In the U.S., most states levy a sales tax when you buy a new vehicle. If you buy a car out-of-state and bring it to your home state, though, it's not always clear which state should receive the tax, since tax laws vary by state. Before you go car buying across state lines, make sure you know how to pay the state sales tax correctly, so you don't get a tax evasion fine.
If I Buy a Car in Another State, Where Do I Pay Sales Tax?
Typically, when you buy a car in a different state than your home state, the dealer collects your sales tax and sends it to the relevant agency in your home state. That way, you don't have to deal with the fuss of trying to follow each state's tax laws.
Before the Department of Motor Vehicles in your home state can register your new car, 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 there, so you may have to make up the difference if your home state's tax rate is higher.
To avoid confusion when you register at the DMV, make sure you get a bill of sale for your vehicle purchase with the tax included. You don't want to pay a second sales tax just 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?
How much sales tax you need to pay depends on the laws of your home state and the state in which you bought the car.
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 sales tax in Arizona, though 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 dealer proof that you intend to register your car in your home state, such as your driver's license.
If you buy your car from a private seller instead of a dealer, you can pay the sales tax when you register the vehicle in your home state. If you take this approach, though, the DMV in your home state may need to check the car's vehicle identification number to ensure it matches the out-of-state title.
When transferring cars between states, remember that legal differences between states extend beyond taxes. Some states require a smog test before registering a vehicle to ensure it meets emissions requirements. 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. Also, car taxes between states vary widely. As of 2019, New York has a car tax rate of 4 percent plus local taxes, whereas Pennsylvania has a state car tax rate of 6 percent, with some local rates much higher.
What About Special Circumstances?
Because U.S. state tax laws vary so much, there are many individual circumstances to take into account 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 dealer to cover part of the cost of a new car.
However, California, Michigan, Oklahoma, Virginia and District of Columbia don't do this.
Also, 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 dealer or private party when buying the used car, but you do need to pay it when you register the vehicle in your home state.
Some states, such as California, charge use fees 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 on the car's value when you register it.
Some states charge yearly excise fees for cars or a fee whenever you renew your registration. These fees are in addition to the sales tax you must pay.
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 easiest way to do so is to buy a car in a state with no sales taxes and register the car there.
There are five states without sales taxes: Montana, Alaska, Delaware, Oregon and New Hampshire.
Unfortunately, unless you register the vehicle in the sales-tax-free state, you still have to pay the sales tax when you register the car in your home state, 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, you should buy the car and register it about three months before your move. This way, you don't have to pay a sales tax on your vehicle in the new state when you re-register it.
There are other loopholes, too. Cars built before 1973 are typically exempt from sales taxes, and vehicles used for certain types of farming are as well. You also don't need to pay the sales tax if you're disabled. Just make sure you include a tax exemption disc on your vehicle to display your status.
Finally, you may receive tax deductions on your vehicle if you add it in your tax filing, such as if your car meets low-emission criteria. These deductions can mitigate the sales tax you have to pay when buying the car.
Sales taxes are 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 making a purchase across state lines.