Montana LLC RV Titling: Tax avoidance or Tax Evasion?
One of the biggest controversies in the RV world these days has to do with the fine line between tax avoidance and tax evasion.
I’m talking about the practice of setting up an LLC business in Montana to purchase a motorhome, thus avoiding sales and use tax and often stiff registration fees in the owner’s home state. Thousands of RV owners around the country do this and dozens of Montana legal firms specialize in making it happen.
I live in a state that has very high taxes. As I am shopping around to upgrade my 2006 RV to a new model I have come face-to-face with the huge tax burden my state (Michigan) imposes. When I bought the 2006 RV in April, I paid some $5,000 in sales tax and registration fees. Gulp.
If I trade in that unit and buy a new motorhome, Michigan will hit me again. And unlike many other states which tax only the difference between the trade-in and the new model, Michigan will tax the entire value of the sale. Unfair? Absolutely. Outrageous? Yes. Legal? Unfortunately, it is legal for a state to be a tax gouger. And I live in such a state.
So this Montana scheme is very appealing. Essentially, it works like this: You form an LLC business in Montana. It costs you about $1,000 to have one of the Montana law firms set up your LLC and do the registration and titling paperwork and send you back the Montana license plates. Because Montana has no sale tax on an RV, your only cost is the $1,000 to set up the business that technically owns the RV, a Montana corporation, and the $150 or so the law firm charges every year to renew your registration and LLC charter.
All this is perfectly legal in Montana. Indeed, forming LLCs and registering RVs like this is a big business out there.
The rub comes in your home state.
The high tax states that do impose use and sales taxes and high registration fees on RVs quickly took steps to counter the scheme by writing laws and regulations that make it very difficult to take advantage of the plan. In my state, for example, Michigan Compiled Law sections 257.215, 257.216, and 257.217 require that “a nonresident owner of a pleasure vehicle otherwise subject to registration under this act shall not operate the vehicle for a period exceeding 90 days without securing registration in this state.”
Is there a loophole there? Some Montana law firms say there is. They say if you take the motorhome out of your home state once every three months, you’re legal. They interpret that as keeping the motorhome in your home state for 90 consecutive days, So, if you head out of state after 89 days, they claim, you’re good. When you return, you can stay another 89 days before you have to take an out state trip. Naturally, they caution the RV owner to keep detailed records that establish the motorhome’s whereabouts.
That’s how the Montana law firms insist you can avoid high registration fees.
The biggest bite in buying an RV in one of the high tax states like Michigan comes in the form of a use tax, or sales tax, currently 6% in Michigan. And because Michigan and other states have agreements to collect each other’s sales taxes, buying out of state alone is not the solution. As far as sales and use taxes on an RV, my home state has two provisions – one for non-residents, one for residents.
For non-residents, which the Montana LLC that “owns” the motorhome would technically be, an exemption to the tax would be allowed provided the motorhome is “purchased by a person who is not a resident of this state at the time of purchase and is brought into this state more than 90 days after the date of purchase.” An LLC is considered a legal entity, able to buy and sell property. In other words, to avoid the Michigan taxes you would buy the RV out of state through the LLC and keep it out of state for three months. The issue here, though, is what would a court decide? If the LLC is in Montana but the owner of that LLC is in Michigan. what is the reasonable assumption here? Pretty obvious, don’t you think? The LLC in Montana is owned by a Michigan resident.
In that case, if the property is owned by a resident, Michigan says you must pay the tax unless the motorhome “is brought into this state more than 360 days after the date of purchase.” That means buy it out of state and travel anywhere but your home state for a year.
You can clearly see by these legal restrictions that the other states don’t take kindly to Montana’s proffered loophole to potential RV owners. Just do a Google search on Montana LLCs and you’ll see how they are trying to drum up business by touting LLCs that allow you to buy “no sales tax motorhomes” or “tax free.”
That sort of exploitation only fuels the resolve of the high tax states to shut down the loophole.
Thus, Michigan, Colorado, California and a number of other states are very aggressive in hunting down RVs with Montana license plates and suing the owners for taxes and penalties. Some of the RV forums claim they have set up tip-lines with rewards for people who spot RVs with Montana plates parked in storage yards or driveways for long periods of time. Others say inspectors check out RV repair facilities and look for vehicles with Montana plates.
A very evenhanded and comprehensive review of all this can be found on the RV Dreams website,
I need to say here that a great many RVers have taken advantage of the Montana law with no issues. For fulltimers, who are gone for very long periods from their home states, it appears to be very workable, especially if those fulltimers have established residency in a low tax state like, say, Florida.
But for me, as I look at buying a brand new RV, I’m not going to go the Montana route.
I admit, the benefits of saving thousands of dollars in sales and use taxes are very tempting.
But as states scramble to shore up sinking deficits, I think we can be sure that pursuing RV owners with Montana plates is going to increase, not decrease. Even if you should be sued and won, I can guarantee the legal costs of defending yourself would far exceed what you saved on the taxes you avoided. Besides this, many insurers frown at covering an RV that is titled in Montana.
The big reason I am not going to go the Montana route should I buy a new RV is because, I think, it borders on the unethical. It’s clearly a tax dodge. As long as I live in Michigan, I am subject to its laws. And Michigan laws demand I pay a sales tax on my RV. I know, I know, some will say the Montana LLC is the legal owner. But I am the legal owner of the LLC. That means, in effect, I own the RV with Montana plates. And I live in high taxing Michigan. I may not like those laws, but my conscience just won’t let me do something that – to me – seems questionable.
Again, I understand that others see this differently and have and will decide otherwise. They very well may never be sued or have an issue. They may see no ethical dilemma. I don’t criticize them for their decision.
I just know my new RV – if and when I get it – will have Michigan plates.
The hassle of always looking over my shoulder just isn’t worth the tax savings.
There’s got to be another way. But that will have to be the subject of another post.