To save money when buying your next vehicle, consider buying it in a state that doesn't charge sales tax. There are more than a handful of states with no sales tax on cars. If you live somewhere like New Mexico or New Hampshire and buy a car or SUV there, you won't have to pay any sales tax on it. If your state charges sales tax, a trip across a state line to a place that doesn't tax you for your purchase might be worthwhile.
What Is a Sales Tax?
A sales tax is an amount of money state and local governments require sellers to collect when they sell goods or services. Sales taxes differ from excise taxes, which are flat-rate taxes you pay when you buy something such as motor vehicle fuel, or the materials to make a product. To compute state sales taxes on motor vehicles in most states, multiply the purchase price of the vehicle by the tax rate that applies. Typically, the more money a vehicle costs, the more sales tax a buyer pays. If a vehicle sales tax applies, the vehicle seller must collect the tax when the sale transaction occurs. Alaska, Delaware, Montana, New Hampshire, and Oregon don't impose any state sales taxes, as of 2018, while New Mexico charges sales taxes, but not on cars. A tax rate of zero can equal a lot more cash staying in your pocket.
State and Local Sales Taxes Can Be Charged
Many states that charge sales taxes at the state level also allow their local governments to impose sales and use taxes. The result is that you might pay more in taxes for the same vehicle at the same sales price, depending on the city or county of the state in which you buy the car. For example, in New York, the state sales tax rate is 4%, but county and local taxes can boost the rate up to 4.5% more. In other words, you might pay a tax rate between 4% and 8.5% for the same car at the same sales price. The good news for consumers is that New York limits its vehicle sales tax to a maximum of $725. A trip to Delaware or New Hampshire might mean no sales tax at purchase time.
States With No Sales Tax on Cars
If you don't live in or near New Hampshire, Delaware, Montana, Oregon, Alaska, or New Mexico, other states offer the opportunity to buy a vehicle without paying sales tax. Buy a car in Maryland, North Carolina, Iowa, or South Dakota, and you might be able to skip the cost of sales tax on your Ford, Chevy, or Subaru. Washington, D.C. doesn't charge sales tax on cars, either. However, some of these states charge use taxes, which serve the same purpose as sales taxes.
Florida Laws Benefit Buyers From States Without Sales Tax
People who live in states that don't charge sales tax on used or new cars can use their home state's tax laws to their advantage in Florida. Under Florida law, out-of-state residents who buy used or new cars in the Sunshine State get a partial exemption of sales and use taxes. Florida only collects sales tax in the amount that purchasers would pay in their home states. This tax policy means residents of New Hampshire, Delaware, Montana, Oregon, Alaska, and New Mexico, who find and buy their dream cars in Florida don't pay sales or use taxes in Florida.
When buying cars in Florida, Alabama residents pay only 2%, and Colorado residents pay 2.9%, their state's respective sales tax rates. Hawaii and Wyoming residents pay 4%, and Louisiana residents pay 5%. If you live in a state with a sales tax rate higher than Florida, such as New Jersey, California, and Tennessee, Florida gives you a partial exemption. The result? You pay a maximum of 6%, Florida's state sales tax rate, which saves money for you.
No Florida Exemption for Certain States
Residents of Arkansas, Mississippi, and West Virginia who buy cars in Florida must pay motor vehicle sales tax to their government because their states don't give credit for taxes paid to the state. Florida's state sales tax policies mean buyers get taxed twice for their motor vehicle purchases. These out-of-state residents end up paying tax in Florida at the sale and paying again in their home states when they license their vehicles at the DMV.
How to Claim the Florida Sales Tax Exemption
Nonresident buyers must apply for their exemption when the sale occurs. Whether the transaction is through a dealer or a private individual, the buyer must fill out and submit Form DR-123, Affidavit for Partial Exemption of Motor Vehicle Sold for Licensing in Another State. This form states the buyer's intent to license the purchased vehicle in their home state within 45 days of the purchase date. If the sale is through a dealer, the buyer gives the form to the dealer. In a private sale transaction, the buyer provides the exemption form to the private tag agent or tax collector when purchasing the vehicle's temporary tag.
Michigan's Sales Tax Exemptions Similar to Florida's
As a general rule, if you live out of state, buy a car in Michigan, and take delivery there, you must pay sales tax in Michigan. However, if you have the dealer or seller ship or deliver your car to a location outside the state, then no sales tax is due back to Michigan. For example, if you live in Illinois, Indiana, or Minnesota, buy a car in Michigan, and have the seller or dealer deliver it to your home state, you won't pay any sales tax in Michigan. But if you decide to drive the car home to Illinois, Indiana, or Minnesota, the dealer must charge you sales tax in Michigan.
Like Florida, Michigan exempts out-of-state car buyers from sales tax when their home state has no sales tax on cars. So if you buy a Ford F-150, Chevy Tahoe, or Honda Civic in Michigan, but plan on titling and registering it in one of the sales tax-free states, – such as Alaska, Delaware, Montana, New Hampshire, Oregon, or New Mexico – the state of Michigan exempts your vehicle from its sales tax.
Michigan also exempts residents of the District of Columbia and 10 non-reciprocal states from sales taxation. In the West, these states are Oklahoma, Arkansas, West Virginia, South Dakota, and Nebraska. In the East, they include North Carolina, South Carolina, Georgia, Mississippi, and Maryland. Because these states impose a use tax, which serves the same purpose as a sales tax, Michigan allows exemptions to protect purchasers from being taxed twice for a single sales transaction.
Buying your new car is a significant event and is one of the most expensive and longest-term purchases many people make. Therefore, it's worth spending some extra time searching for ways to save some money – a lot of money, in some cases. If you live in or near one of the states with no sales tax on cars, take full advantage of your money-saving position. Do your research, find the vehicle you want, and make your best deal. Then, congratulate yourself on how much you saved by being in the right place at the right time.