In the US, most states levy a sales tax when you buy a new vehicle. If you purchase a car out-of-state and bring it to your home state, though, it is 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 properly, so you do not end up with 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 where you reside, the car dealer collects your sales tax at the time of purchase and sends it to your home state's relevant agency. That way, you do not have to deal with the fuss of trying to follow each state's unique tax laws. Before the Department of Motor Vehicles in your home state will register your new vehicle, they may check the bill of sale to ensure you paid the sales tax, so you should not try to skimp on paying it.
Dealers often tax out-of-state buyers the amount they would pay if they lived in the state in which they are 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 do not 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 US, 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. 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. For instance, 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, such as providing your driver's license. If you buy your vehicle from a private seller instead of a dealership, you can simply pay the sales tax when you register the car 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 (VIN) to make sure it matches the out-of-state titling.
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. 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 is no guarantee you can register it in your home state, even if you have already paid for the vehicle and all associated taxes. In addition, car taxes between states vary widely. 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 is also helpful to know when asking for financing from a lender.
What About Special Circumstances?
Because US state tax laws vary so much, shoppers must take into account 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, eight states, including California, Michigan, and Virginia, do not offer tax credits in this circumstance. Additionally, if you buy a used car instead of a new one, you must still pay a sales tax. You do not need to pay the tax to the vehicle dealer or private party when buying a used vehicle, but you need to pay it when you register the vehicle 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 have 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 vehicles or a fee whenever you renew your registration.
These fees are in addition to the sales tax you must pay. Paying close attention to these details before buying a car 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 easiest and most straightforward way to do so 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 is important to state that using dummy addresses does not 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 prior to making your move. This way, you do not have to pay a sales tax on your car in the new state when you re-register it.
There are some other loopholes, too. Cars built before 1973 are typically exempt from sales taxes, and vehicles used for certain types of forestry and agriculture are as well. You do not need to pay the sales tax if you are 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 making a purchase across state lines. Doing this can save a lot of hassle on the test drive and down the road.