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If I Buy a Car in Another State Where Do I Pay Sales Tax?

By Zac Estrada | June 20, 2022

If I Buy a Car in Another State, Where do I Pay Sales Tax?

In most cases, you will pay the sales tax based on where you live, not where you buy the car. However, you'll need temporary registration from the state of purchase to drive it home, so you'll have to deal with two Department of Motor Vehicles offices or similar state vehicle agencies.

Sales tax is one of the most significant additions to the price of any goods, from tablets to TVs, liquor to lederhosen. That sometimes entices people to go to a different city, county, or even state, to buy expensive items where the sales tax rate is lower or nonexistent.

Some people might think the same logic applies to bigger purchases, such as new vehicles. But some laws prevent buyers from dodging local taxes when purchasing expensive things. And buying a car in a different state can bring other fees.

Before car buying across state lines, make sure you know how to properly pay the state sales tax to avoid penalties and fines.

Buying a Car in Another State

Car buyers can get easily excited when finding exactly what they want. But don't get ahead of yourself too quickly. The car buying process shouldn't be rushed, especially if you've found an ideal car in a different state.

It's worth considering buying a car in another state if it means not settling for a car you're not happy with or getting a better deal a little further from home. Regardless of the reasons, careful planning is a must to avoid additional costs and the tax payment arrangement before bringing 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 from Carfax or AutoCheck.

  • Have a vehicle inspection performed, including a safety and smog test if required by the state.

  • Register the vehicle. It may involve the temporary registration of the car in the state you purchased it from, and then registration in the state it will be permanently registered.

  • Contact the insurance company to arrange vehicle insurance cover.

  • Pay taxes on the car.

  • Titling: Obtain the car's title

Buying From a Private Party Out of State

If you decide to purchase your new car from a private seller in another state, the state of residence will collect sales tax after the vehicle is registered there. When you visit the state's vehicle registration agency, you'll need the out-of-state title and the bill of sale from the seller. Ensure you have enough money to pay 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 and sends it to your home state's relevant agency. The car dealer will follow their own state's sales tax collection laws. You don't have to figure out each state's various 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 vehicle authority in your state registers the vehicle, they may check the bill of sale to ensure you paid the sales tax. To avoid confusion at the state 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.

Also, keep in mind that there are approximately 10,000 sales tax jurisdictions in the US, including cities, counties, and other districts, and each jurisdiction has its own tax laws. Therefore, it pays to research the appropriate taxes to pay before signing for the car.

How Much Sales Tax Do I Need to Pay for a Vehicle?

That depends on your home state's laws and the state where you bought the car. For instance: As of 2020, New York has a car tax rate of 4% plus local taxes, whereas nearby Massachusetts charges 6.25%, with some local rates even 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. So if a California resident buys a car in Arizona, they may be exempt from paying the Arizona sales tax, but not in California.

Each state's vehicle registration agency's website usually lists the state's tax relationships with other states, which is worth checking before buying a car. Even if in a non-reciprocal state, it's to avoid paying their sales tax if you give the car dealer proof that you're going to register your car in a state where you claim residency.

Other Considerations for Buying a Car Across State Lines

Emissions Testing:
When transferring cars between states, legal differences between states extend beyond taxes. For example, some states require a smog test before registering a road vehicle to meet emissions requirements. Most cars have stickers under the hood or some other type of verification to prove that they have been manufactured with emissions systems that pass either emission standards in California-level states or all 50 US states.

The California Air Resources Board (CARB) is particularly strict about this, and every car made from 1976 and later has to pass a smog test to be registered in the state. There's no guarantee you'll be able to register any vehicle in a different state, even if you've already paid for the car and all associated taxes. Ask the seller about its emissions status and if it's ever passed smog in another state, and inspect the vehicle history report for that information.

Safety Inspection:
Many states require your used car purchase to pass a safety inspection before you can receive the registration and titling. While more typical in states where roads are salted in the snow, it's meant to check for rust that could be so severe it affects the vehicle's safety and for brakes and other equipment like lights are in working order.

Regardless of being able to pass inspection, though, it's essential to check the vehicle before through pictures and in person if there are undisclosed safety issues.

Vehicle Insurance:
Unless you plan to hire a third-party transport service to deliver a car, you'll need auto insurance ready that covers the recently purchased vehicle. Insurance coverage is also necessary for registration and titling upon return to your home state. Get the appropriate coverage when financing or leasing a car, too.

What About Special Circumstances?

Because US state tax laws vary so much, shoppers must consider any special circumstances when buying a car in another state. For example, most states provide tax credits for the trade-in of another vehicle. However, seven states do not offer tax credits in this circumstance: California, Michigan, Virginia, Hawaii, Kentucky, Maryland, and Montana.

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 it must be paid when registering with the motor vehicle registry 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, the excise tax is 3.25% of the vehicle's purchase price when first registered. Some states charge annual excise fees for vehicles or a fee whenever you renew your registration.

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 a tax-free state, you will still have to pay the sales tax when you register the vehicle in its state of residence.

And using dummy addresses doesn't fool revenue departments. If you plan to move from a state without sales taxes to one with sales taxes, it's best to buy the car and register it for about three months before moving. That way, you don't have to pay a sales tax on the vehicle in the new state when you re-register it.

There are some other loopholes, too. Classic cars have a rolling tax exemption. For example, vehicles manufactured more than 40 years before January 1 of the year is automatically exempt from sales tax, and vehicles used for certain types of forestry and agriculture are also used.

People who claim disability may also be exempt if they qualify for a certain placard or license plate.

Depending on the state, there are also different rules and surcharges for electric vehicles.

Finally, there may be additional vehicle tax deductions if you claim it on your tax filing, assuming it meets specific criteria. 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 state agencies before purchasing.