Fast and Furious: Tennessee Department of Revenue Pursuing Montana Holding Companies for Criminal Sales Tax Evasion

The Tennessee Department of Revenue is known for its criminal investigation of convenience store owners and other small businesses for collecting Tennessee sales and use tax but not remitting the sales tax to the State. Tennessee law is clear on this point that businesses have a fiduciary duty to remit these trust fund taxes to the state on a monthly basis and that the failure to remit these taxes can result in criminal prosecution. We know of these prosecutions typically from press releases of the Department of Revenue touting its enforcement of Tennessee’s tax law.

We have recently seen a new phenomenon from the Special Investigations Unit (aka the Criminal Investigations Unit) in a completely different area of the tax law. Failure to pay tax on vehicles imported into Tennessee and held in Montana-based holding companies. These cases do not involve sales tax collected and not paid over to the state. Instead, these cases involve what the Department perceives to be as tax evasion. The most recent news on this front was released by the Department on March 21 with the news that a Tennessee resident had plead guilty to felony tax evasion on a motor vehicle held in a Montana holding company.

Wilson County man pleads guilty to tax evasion as sole member of his Montana LLC

Steven R. Griffith, 49, pleaded guilty to one felony count of tax evasion in Wilson County criminal court Tuesday and received one year of probation.

A Wilson County grand jury previously indicted Griffith for tax evasion after he violated Tennessee law by failing to pay sales tax on vehicles purchased by his Montana limited liability corporation, and signing a sworn affidavit that said the vehicles would be removed from the state within three days of purchase.

“The Department of Revenue has always been committed to making sure Tennessee’s tax laws and procedures are applied uniformly to ensure fairness,” said Revenue Commissioner David Gerregano.

“We want Tennesseans to know that individuals cannot evade sales tax by falsifying registration documents and failing to register vehicles as the law requires,” said special investigations director Tommy Sneed. “Tennessee citizens who engage in this type of fraudulent activity will be held accountable.”

This prosecution is similar in some respects to a case decided by the Tennessee Court of Appeals in 2014 - McCurry Expeditions, LLC v. Roberts. In McCurry, the Tennessee Court of Appeals concluded that sales tax was due on a motor home owned by a Montana LLC but stored in Tennessee. Notably, Tennessee did not seek a criminal prosecution in the McCurry case. It was simply a civil tax assessment dispute.

With the prosecution noted in the press release above, it appears that the Department has amped up its pressure on these Montana holding company structures, which appear to be founded on the fact that Montana does not impose a sales tax on tangible personal property.

It is unclear whether there may have been extenuating facts in the Department’s recent prosecution as the press release notes that accused signed “a sworn affidavit that said the vehicles would be removed from the state within three days of purchase.” The release also states that the Department wants to dissuade individuals from “falsifying registration documents.” Based on these statements, the prosecution could have been based in large part on the proactive filing of forms with the state to misrepresent the use of the vehicle as opposed to the actual purchase and holding the vehicle in the Montana entity.

Regardless, owners of Montana holding companies should be aware of the Department’s “fast and furious” audit activity, including these special investigations and seek counsel on their options to address any risks presented by these structures. Options may include voluntary disclosure agreements or establishing dealerships to formalize the purchase and sale of motor vehicles.  

We will continue to monitor developments in future posts.