Montana LLCs - A Hot Topic
This is a complicated legal subject. There is no substitute for your own professional advice on your particular situation. Below I lay out information that will hopefully lead you to seeking out the proper legal advice on this topic. I've done my best to try not to misinform our readers. However, if there are any errors or misstatements, I will be happy to review any statutes, case law, or official state pronouncements that contradict what I've laid out here and I will quickly publish corrections. Also, the laws are changing rapidly in this area, so if there is reliable updated information or news, please send that as well. Thank you.
What's This Montana LLC Thing All About?
Well, I'll try to explain it.
Montana is a state with no sales tax. And Montana law allows for a Montana entity to register vehicles in the state. Here is the pertinent statute:
Montana Code Annotated § 61-3-303, entitled “Original registration -- process – fees,” and which provides, in subsection (1), the following:
(1) Except as provided in 61-3-324, a Montana resident who owns a motor vehicle, trailer, semitrailer, or pole trailer operated or driven upon the public highways of this state shall register the motor vehicle, trailer, semitrailer, or pole trailer in the office of the county treasurer in the county where the owner permanently resides or, if the motor vehicle, trailer, semitrailer, or pole trailer is owned by a corporation or used primarily for commercial purposes, in the county where the motor vehicle, trailer, semitrailer, or pole trailer is domiciled. (emphasis added)
The Montana Attorney General has interpreted the statute to mean that a Montana entity (other than just a corporation which is the only entity specifically stated) may make a legal registration in Montana.
So, some enterprising attorneys and other companies saw dollar signs. And now there is a whole industry based on the establishment of Limited Liability Companies (LLCs) for RV purchasers to avoid sales tax.
It works like this. You want to buy a $300,000 motorhome, but you would prefer not to pay the 6% (or whatever it is) sales tax in your state. Of course, we would all like to save $18,000 if we can.
So you can set up an LLC in Montana and purchase the motorhome in the name of the Montana LLC and register it in Montana thereby avoiding paying sales tax in your state of residency. But it's not without risk.
Now, few topics in the RV world generate more discussion and heated debate than this one. And there is a lot of misinformation out there.
Let's answer some questions to get to the truth about the use of Montana LLCs.
Are They Legal?
That's one of the big arguments. Those that use Montana LLCs are adamant that they are legal.
The first thing we have to do is distinguish between an LLC that is set up and actually conducts business in pursuit of income and an LLC that is set up soley to avoid sales taxes.
An LLC that actually conducts business in the pursuit of a profit is legal everywhere. You don't even need to set it up in Montana as there are other no-sales-tax states where you can do that (Alaska, Delaware, New Hampshire, Oregon).
But Montana promotes the setting up of shell LLCs simply to avoid paying sales taxes. All you have to do is Google "Montana LLCs" and you will see all kinds of websites using the words "avoid sales tax". It is these shell LLCs that require analysis.
The problem is we are dealing, not with a federal law that addresses the issue nationwide but rather, with the laws of two states (Montana & your residence state) that may be (probably are) in conflict.
In Montana, setting up a Montana LLC for out-of-staters for the purpose of avoiding sales taxes is perfectly legal. There is absolutely no question about that.
However, your state of residency does NOT have to follow Montana law. So if their laws conflict with Montana on this issue, they have every right to ignore the Montana LLC, and make the RV purchaser pay sales taxes.
So the answer is "yes, sort of". The real Montana LLCs are legal everywhere. The shell Montana LLCs are legal ... in Montana. But the laws of your residency state control on this issue, so the answer might be "yes" or it might be a big "no" and it is most likely a big "no".
Take a look at this excerpt taken from a letter that is published on the internet at this link. The letter was written by John Bennett of the Bennett Law Office in Montana, considered by many to be the foremost source on Montana LLCs.
The Laws of Other States
Some states restrict one’s right to avoid registering a motor vehicle in the state of one’s residence even if one is operating a motor vehicle owned by a non-resident (in this case the non-resident is the Montana business entity). We research the laws of the states of residence of our clients and inform them of the results of our research. Please note that we are licensed attorneys in Montana and our interpretation of other state’s laws may differ from attorneys in those jurisdictions. (emphasis added)
It is a good idea to consider purchasing your vehicles in a state other than your state of residence.
While this does not change the legal standards regarding your state’s vehicle registration and sales and use tax laws, it may reduce the likelihood of your being audited or scrutinized regarding your vehicle’s registration and use. States have different regulations and procedures regarding collecting or not collecting sales and use tax, which includes out-of-state delivery, affidavits, and time restrictions in which the purchased vehicle must be removed from the state. If you have questions regarding these issues, our attorneys will happily discuss them with you. We recommend you keep a log with receipts to show where the vehicles are located and operated. If you are ever audited or questioned, your log and receipts will provide evidence that you complied with the laws. If you purchase vehicles in your home state, this is even more important since your likelihood of getting audited increases.
Now, this is a well-known (in the RV world anyway) Montana lawyer clearly stating that he is not licensed in other jurisdictions and his interpretation of different state laws might not be correct. Is it prudent to rely on the word of a Montana attorney who has no license and no accountability in your residency state? It is the residency state's laws that count.
Before I leave this, let's look at a couple more things from the above excerpt. Does it not raise a red flag when an attorney advises you not to purchase your RV in your state of residency because your likliehood of audit may increase? And why is there such a concern over you being audited or scrutinized? After all you got legal advice, so it's all legal, and the attorney will be liable if it blows up, right? I wouldn't count on it.
Just something to think about.
Tax Avoidance vs. Tax Evasion
I have absolutely no issue with legal tax avoidance. That's what this is, right?
Well, maybe, but probably not. Again, if your residency state's laws consider it tax evasion, that's what it is.
Everyone likes to have this argument, and often the Montana LLC issue is compared to income tax loopholes.
Well, income tax loopholes are generally loopholes in federal law that allow federal tax avoidance. That same logic applies to single states where that state has a loophole allowing income tax avoidance within the same state.
In this case, we have Montana laws attempting to usurp other state laws. This is not a loophole-type tax avoidance issue. It is a classic "conflict of laws" legal issue. And the state with primary jurisdiction, your residency state, will likely control.
Tax evasion or tax avoidance? Some states are very clear on the issue.
Here's a quote from Missouri:
"Montana lawyers say it's legal and it may be legal in Montana, but in Missouri you're evading taxes, you're evading state sales taxes, local sales tax," says Department of Revenue public information officer Maura Browning.
That was taken from an article dated June 8, 2006 titled "Out-of-State RVs Avoiding Missouri Taxes". The article has since expired and the link is no longer is available.
And here is an excerpt from a November 26, 2006 article in the Bozeman (Montana) Daily Chronicle:
Dean Roberts, administrator of the Montana Department of Justice Motor Vehicle Division, said the problem is not just buyers from California.
"It's Texas, Florida, pretty much places where people winter," Roberts said.
Even though the process is legal in Montana, Roberts said, there is a legal courtesy to consider.
"We have some obligations to protect the laws of the other 49 states," he said.
That's a Montana official speaking. Here is the link to that article: Out-of-Staters Escape Hefty Motorhome Tax by Buying in Montana
How about Colorado? Another quote from an article dated April 26, 2007:
"These aren't just state taxes they're avoiding, they're avoiding local taxes as well," said Roxy Huber, Executive Director of Colorado's Department of Revenue. "If they're registering it out of state solely to avoid taxes, they are in violation of the law."
That same Colorado article, Some Drivers Cheat State Out Of Big Money, goes on to say that Oregon, Washington, California, Michigan, Arizona, and Massachusetts are investigating. And some of those states have even established tip lines for residents to call to report neighbors with RVs with Montana tags.
We even have readers of this website that were implicated in a Colorado lawsuit due to their Montana LLC registration. They posted a caution in our Forum.
The RV owners were actually charged with a felony. My guess is that was because the transaction crossed state lines and the federal postal system was probably used in the establishment of the LLC. But I do not know that for sure.
Just know that Colorado is being very aggressive on this issue.
Here's another report from Colorado dated May 21, 2008:
RV owners who registered in Montana convicted for tax evasion
Massachusetts is another state that is becoming more aggressive. Here is a quote from a different article:
Ann Dufresne, director of communications for the Massachusetts Registry of Motor Vehicles, warned drivers would face stiff penalties for trying to avoid the state's sales and excise taxes and other fees.
Here's a link to that entire article dated January 26, 2008:
Massachusetts Motorists Skipping Sales Tax Through Montana Loophole
Another quote from the Massachusetts article where Mr. Roberts (the Montana official) once again denounces his own state's practice:
But the process has earned the ire of some Montana officials, including Dean Roberts, administrator for Montana's motor vehicle division.
"This is upsetting the laws of the other states. We don't like the practice," Roberts said. "I don't like it from an ethics point of view."
States such as California actively investigate whether a resident is using Montana's laws to skip paying sales tax, and Montana officials will cooperate in those efforts, he said. But curbing the practice is hard, he said.
Because there are so many forum posts that claim practice of using a Montana LLC is "legal" in many states, I decided to make a few phone calls to the states where most full-time RVers have residency: Texas, South Dakota, and Florida.
All three states told me the practice of setting up a Montana LLC for the sole purpose of avoiding sales taxes is absolutely a violation of their laws. While they do not seek out these situations, they will investigate individuals that are brought to their attention.
So it seems that these states don't care a whole lot about this practice right now and aren't interested in aggressively pursuing those with Montana LLCs. The big RVer residence states have simply not been interested in enforcing the laws. However, I wouldn't be surprised if that changes with budget shortfalls and need for revenue. So it is "safer" right now to have a Montana LLC as a resident of Texas, South Dakota, and Florida, but it is not considered legal according to the officials I spoke with.
I will say that the risk of enforcement is less for full-timers and other RVers that rarely or never take their Montana-registered RV into their "residence" state, but that simply makes getting caught less likely. It doesn't necessarily mean the practice is legal according to their residence state's laws.
In fairness, I did find one case where the Michigan Department of Treasury sued a Montana LLC for over $40,000 in taxes and penalties and the RV owner won on appeal. It was a convoluted set of facts in which the RV owner was a Michigan resident but actually purchased the RV in Florida, registered the RV in Montana under an LLC, and did not enter Michigan with the RV for about a year after purchase. It was a clear case of intentional tax avoidance, but the laws of both Michigan and Florida had enough leeway and the circumstances were just right so that the RV owner didn't have to pay Michigan.
That RV owner's LLC was in fact set up by the Bennett Law Office and the RV owner didn't buy the RV in his residence state as suggested by the law firm; however, though the RV owner won on appeal, it still didn't prevent him from getting sued. And the decision very, very easily could have gone the other way.
It's Just Like Having A Corporation Registered In Delaware ... or Is It?
That's another of the big arguments that the Montana LLC route is legitimate. Corporations become incorporated in Delaware all the time to take advantage of beneficial Delaware corporate laws even though their headquarters are in other states.
You know what? If you establish a Montana LLC and legitimately conduct business on the road, keep separate accounting records for the LLC, and treat the LLC like a business in accordance with the laws that govern LLCs nationwide, you are likely to not have a problem avoiding sales tax in your state of residence.
If, however, you establish a Montana LLC for the "sole purpose" of avoiding sales taxes (which is what the Montana lawyers and companies say you can do), the Delaware corporation comparison fails. All Delaware corporations must conduct legitimate corporate business and follow strict guidelines to be allowed the benefits of their laws.
In corporations and entity law, there is a legal concept known as "piercing the corporate veil". If a corporation or an LLC is basically a facade (or "alter ego") for an individual or group of individuals, the courts can pierce the corporate veil and hold the individuals liable for legal violations and liabilities of the "company".
Let's face it. These LLCs are not being set up to conduct business or even to protect the owners from liability - okay a few are. But for the most part, they are being set up just to avoid taxes.
A Few Final LLC Cautions
Insuring or financing an RV titled in the name of an LLC can be a problem. If you have to finance, you better check this out before doing the LLC thing. And ask your insurance company first as well. There are financers and insurance companies you can work with, but they may not be the people with whom you are used to dealing.
If your diesel powered motorhome is registered under an LLC, you may be required to have a special license or permit. Check out this link on the Family Motorcoach Association (FMCA) website:
LLCs May Require Trip Permit or IFTA License
And, though I don't have facts to back this up, I have heard that it may be a problem (or at least more difficult) taking an LLC-registered RV into Canada or Mexico.
Before I would rely on anyone telling me that the use of a Montana LLC for the sole purpose of avoiding sales taxes is legal tax avoidance, I would want to see an opinion to that effect in writing from the residence state's Attorney General or Treasurer.
Short of that, I would want to see a written legal opinion of an attorney licensed in the residence state so that I had someone that could take the heat just in case they were wrong.
You can't hold a Montana attorney liable in your state of residence if something goes wrong. Why not? Because the Montana attorney (or non-attorney company) only tells you what Montana law allows, and they issue a disclaimer about the residence state's interpretation. Since they are only providing advice under Montana's laws and disclaiming other state interpretations, it's nearly impossible to hold them accountable.
You can do what you want, and I am not offering legal advice, but I would never advise anyone (whether or not in a professional capacity) to use a Montana LLC solely for the purpose of avoiding sales/use tax on an RV purchase.
I certainly wouldn't do it myself, and I don't mind pushing the envelope in the gray areas.
Is there anything you can do to avoid sales tax?
Well, as a full-timer, you have the ability to set up residency in any state in the U.S. If saving the sales tax is that important, become a resident of a no-sales-tax state (Alaska, Delaware, Montana, New Hampshire, or Oregon) prior to buying your RV.
But be careful. Other issues like income taxes, property taxes, and high insurance rates may jump up and bite you. Still, if you are buying a high end RV, it may be worth it.
Let me clarify. You can't just establish residency in a no-sales-tax state, buy the RV, and then immediately change residency to a sales-tax state because it is better for you in all other aspects. The sales-tax state will charge you a "use" tax that is usually the difference between the tax they would have charged and what you actually paid in your prior state of residence.
All sales-tax states will do that, so you would still end up paying sales tax if you changed residence states too quickly. What is different among the states is how long you have to have the RV registered in the no-sales-tax state before the new state no longer asks you to pay their use tax. It might be six months for some states and it might be never for others.
So, depending on the particular state with which you want to establish your permanent full-timer residence, and depending on their time requirements, you may not be charged a use tax at all. If you choose this option and that is the case, you have successfully and legally avoided the sales/use tax on your RV.
Another option is to set up a legitimate LLC in one of the no-sales-tax states, register the RV under the LLC, and actually do business with the RV. Be sure to have extensive recordkeeping and don't give any court a reason to think the LLC is a sham thereby allowing them to "pierce the corporate veil". In other words, you can set up an LLC like you would in any other state in the U.S., run a legitimate business, and get the benefit of no sales tax. Then, the Delaware corporation comparison works.
Of course you can always establish your residence in a state that simply has a lower sales tax rate. You will still have to pay, but if you choose wisely, you may pay less and not have to change residency later.
Let me make it perfectly clear that I am not condemning those that have chosen to register their RVs via a Montana LLC. In 99% of the cases, I believe folks think the practice is legal tax avoidance according to what they have been told.
However, I don't think there will be one other state that will publish a public written opinion that says it is legal under their laws except for the cases where there is an actual business.
The risks of being caught up in a bad lawsuit or even criminal proceedings are increasing every day.