Hilary Pruitt of Evergreen, Colo., has a cautionary tale about sales taxes and vehicle registration.
In 2004 he formed a limited liability company (LLC) in Montana to avoid paying sales tax and higher license fees on his $275,000 Alpine Coach, which he purchased at a Colorado dealership.
In May 2008 he pleaded guilty to tax evasion charges stemming from this purchase.
It’s illegal for Colorado residents to register their vehicles out of state, but the tax savings can be enticing ….
Looking into LLCs
Before buying the Alpine Coach, Pruitt started exploring the possibility of forming a Montana LLC. He learned that attorneys or registered agents can prepare and file LLC documents for you, based on information you provide via telephone or the Internet. They’ll register the motorhome under your LLC’s name, and mail the license plates and documentation to you.
A Montana LLC is considered a Montana resident and, like the residents of Montana, does not pay sales tax.
Pruitt contacted an attorney in Montana who regularly advertised LLC services. “I was told that the practice had been working for many years for thousands of people in multiple states, he said. “I even checked with my local attorney and he said there had never been any cases tried. Of course, they both threw in their disclaimers.”
Forming the LLC
On the same day Pruitt arranged to purchase the Alpine Coach, he set up the Montana LLC by telephone. Using a credit card, he paid $1,280 for license plates, LLC filing fees and attorney fees. He received his Montana license plates via postal mail a few weeks later.
If Pruitt had registered the coach in Colorado, he would have paid a 4.1-percent sales tax on the $275,000 coach at the time of purchase. That’s the rate the state was collecting in 2004 for unincorporated Jefferson County, where Pruitt lives. In addition, licensing the motorhome in Colorado would have cost $3,200, he said.
Three months after buying the Alpine Coach, the Pruitts bought a towed vehicle, a Jeep Cherokee, and registered it under their Montana LLC, as well.
Everything went along fine until spring 2007, Pruitt said. "One of the local TV channels did an expose on how much money the state of Colorado was losing due to people illegally registering their RVs out of state. One of my neighbors saw fit to turn me in.”
The Revenue Department and Attorney General’s Office launched an investigation, and in summer 2007, agents from the Colorado Bureau of Investigation showed up at this doorstep.
In May 2008 Pruitt was one of 12 individuals to plead guilty to charges of failure to pay tax. The court said he must register his motorhome in Colorado and pay $9,720 in unpaid taxes and fees to the state.
He wants to make others aware of the implications of forming a Montana LLC to avoid sales tax and higher license fees in their home states.
Trial 'not worth the risk'
Pruitt and his wife, Joy, work for a mortgage company that has branches in 17 states, including Colorado and Arizona, where they are licensed brokers.
Although they own a home in Evergreen, the Pruitts actually kept the motorhome out of Colorado for most of the first six months of ownership. “We were looking at conducting the mortgage business from Arizona in the winter and Colorado and other places in the summer.”
Pruitt figured the fact that they kept the motorhome out of state for an extended period, on business-related travel, could be used to argue the case in their favor. But things didn’t work out that way.
According to Colorado law, a Colorado resident is “any person who owns or operates any business in this state or any person who has resided within this state continuously for a period of 90 days or has obtained gainful employment within this state, whichever shall occur first.”
“The way state officials put the case together," Pruitt said, "you just can’t take the risk of going to trial based on the plea offer. The penalties, if you get convicted in court … compared with the deal they offer, it’s just not worth the risk.”
Pruitt received a deferred sentence. After two years, if he has made restitution and met all conditions of deferment (e.g., no criminal violations), the tax evasion charges will be dismissed without a conviction being entered.
“I spent thousands on an attorney and still had to plead guilty to failure to pay tax.”