In the U.S., most states levy a sales tax when you buy a new vehicle. However, each state differs in its sales tax rulings. This may leave you wondering; if I buy a car in another state, where do I pay sales tax? Before you go car buying across state lines, make sure you know how to pay the state sales tax properly to avoid penalties and a tax evasion fine. Don't panic; we have you covered. In this article, we explore car buying across state lines and cover the topic of where you will pay the car sales tax.
Buying a Car in Another State
Car buying is usually an exciting time in a person's life, especially if it is your first car or upgrading your current vehicle. Don't get ahead of yourself too quickly though, the process of car buying shouldn't be rushed, especially if you have found your next car outside of your own home state.
You may consider buying a car in another state because you couldn't source the make and model you wanted locally, or you may have to find the car cheaper. Regardless of why you have chosen a car purchase outside your home state, you need to do careful planning to avoid additional costs and the tax payment arrangement when you bring the car home.
Ensure you have a thorough understanding of all the steps involved in the buying process, which include the following:
- Obtain a vehicle history report.
- Have a vehicle inspection done.
- Pay taxes on the car.
- Arrange the required safety and emissions standard test results.
- Register the vehicle - this may involve the temporary registration of the vehicle in the state you purchased it from and then the registration of the car in its state of residence once you bring your car home.
- Contact your insurance company to arrange vehicle insurance cover.
Titling: Obtain the car's title
If I Buy a Car in Another State, Where do I Pay Sales Tax?
According to CarFax, you will need to pay your sales tax to the state where you register the vehicle, i.e., in your home state or where you will reside with the car. You will not pay the sales tax to the state where you purchased the vehicle. However, bear in mind that if you plan to drive it back to your home state, you will require a temporary registration card for the state in which you conclude the deal.
Buying From a Private Party Out of State
If you decide to purchase your new car from a private seller in another state, your home state will collect the necessary sales tax once you register the vehicle. When you visit your local Department of Motor Vehicles(DMV), you will need to produce the out-of-state title and the bill of sale from the seller. Ensure you have enough money on hand to pay both the registration fee and the local sales tax. The DMV may also ask you for the vehicle identification number to verify the car matches the out-of-state title you provide.
Buying From a Car Dealer Out of State
Typically, when you buy a car in a different state than your home state, the car dealer collects your sales tax at the time of purchase and sends it to your home state's relevant agency. The car dealer will follow the sales tax collection laws of their own state. That way, you don't have to deal with the fuss of trying to follow each state's unique tax laws. Some states allow the dealer not to collect the tax payment if you prove that the vehicle will not be registered in that particular state. Your out-of-state driver's license would suffice as proof.
Before the Department of Motor Vehicles in your home state can register your new vehicle, they may check the bill of sale to ensure you paid the sales tax, so you shouldn't try to skimp on paying it. Dealers often tax out-of-state buyers the amount they'd pay if they lived in the state in which they're buying the vehicle, so you may have to make up the difference if your home state's sales tax is higher.
To avoid confusion when you register at the DMV, make sure you get a bill of sale from the dealer for your vehicle purchase price with the tax included. You don't want to be in a position where you must pay the sales tax twice because the dealer forgot to send the appropriate paperwork to your local DMV. Also, keep in mind that there are approximately 10,000 sales tax jurisdictions in the U.S., including cities, counties, and other districts, and each jurisdiction has its own tax laws. You may have to pay local taxes on top of state ones.
How Much Sales Tax Do I Need to Pay for My Motor Vehicle?
Determining how much sales tax you need to pay depends on your home state's laws and the state in which you bought the car. For instance: As of 2020, New York has a car tax rate of 4 percent plus local taxes, whereas next-door neighbor Massachusetts has a state car tax rate of 6.25 percent, with some local rates much higher. Knowing how much sales tax to pay when purchasing a vehicle also helps you to know when asking for financing from a lender.
Some states have reciprocal tax relationships, meaning they provide credits to each other whenever their residents pay sales taxes across state lines. For example, Arizona has reciprocal tax agreements with Oregon, Virginia, Indiana, and California. If a California resident buys a car in Arizona, they may be exempt from paying the Arizona sales tax, but they must still pay it in California.
Your state's DMV most likely lists the state's tax relationships with other states, so you should check their web page before making a purchase. Even if you visit a non-reciprocal state, you may be able to avoid paying the sales tax in that state if you give the car dealer proof that you intend to register your car in your home state.
Other Considerations for Buying a Car Across State Lines
Emissions Test Result
When transferring cars between states, remember that legal differences between states extend beyond taxes. Some states require a smog test before registering a road vehicle to ensure it meets emissions requirements. Some vehicles come with a handy label noting that the car was manufactured to meet the emissions testing standards of all 50 states in the U.S.
The California Air Resources Board is notably stringent in this respect. Similarly, safety standards between states often clash. If you buy a car in another state, there's no guarantee you can register it in your home state, even if you've already paid for the vehicle and all associated taxes.
Many states require your used car purchase to pass a safety inspection before you can receive the registration and titling. However, when buying a used car, it is always a recommendation to have a mechanic thoroughly inspect the car before signing the contract. There could be unforeseen issues.
Unless you plan to transport the car across the state border, you will need to have your auto insurance ready so your new vehicle is covered. Insurance cover is also necessary for registration and titling upon return to your home state. If you are financing your car
What About Special Circumstances?
Because U.S. state tax laws vary so much, shoppers must consider any special circumstances when buying a car in another state. Most states provide tax credits for trade-ins - that is when you give your old car to a dealership to cover part of the cost of a new car.
However, seven states do not offer tax credits in this circumstance, namely:
Additionally, if you buy a used car instead of a new one, you must still pay a sales tax. You don't need to pay the tax to the vehicle dealer or private party when buying the used vehicle, but you need to pay it when registering with the DMV in your home state. Some states, such as California, charge use taxes when you bring in a car from out-of-state, even if you've already paid the sales tax on the vehicle.
In Oklahoma, you must pay an excise tax of 3.25% of the vehicle's purchase price when you register it. Some states charge annual excise fees for vehicles or a fee whenever you renew your registration. These fees are in addition to the sales tax you must pay. Before buying a car, paying close attention to these details can help you better understand some of the broader and rolling tax costs associated with the potential purchase.
What Are Some Loopholes to Avoid Paying Sales Tax on Cars?
Sales taxes on cars are often hefty, so you may try to avoid paying them. The most straightforward way is to buy a car in a state with no sales taxes and register the vehicle there. Only five states do not have statewide sales taxes: Montana, Alaska, Delaware, Oregon, and New Hampshire. Unfortunately, unless you register the car in the sales-tax-free state, you will still have to pay the sales tax when you register the vehicle with your home state's DMV.
Some customers will ask if there is a way to get around this, but it's important to state that using dummy addresses doesn't fool revenue departments. If you plan to move from a state without sales taxes to one with sales taxes, you should buy the car and register it about three months before making your move. This way, you don't have to pay a sales tax on your car in the new state when you re-register it.
There are some other loopholes, too. Classic cars have a rolling tax exemption, i.e., vehicles manufactured more than 40 years before 1 January of that year are automatically exempt from sales tax, and vehicles used for certain types of forestry and agriculture are as well.
You don't need to pay the sales tax if you're disabled. Make sure to display a tax exemption placard on your vehicle to show your status.
Shoppers looking to go green will find that some states offer tax credits for some electric cars.
Finally, you may receive tax deductions on your car if you include it in your tax filing, assuming it meets specific criteria. One example could be if it falls under low-emission standards. These and other deductions can help lessen the sales tax burden you have to pay when buying a car.
Sales taxes can be tricky when you buy a car out of state. Generally, you pay the dealer the sales tax, and the dealer sends the revenue to your home state, but exceptions abound. Make sure you consult your local DMV before purchasing across state lines. Doing this can save a lot of hassle on the test drive and down the road.