Five states don't currently charge sales tax on new or used cars: Alaska, Delaware, Montana, New Hampshire, and Oregon.
But some other states offer the opportunity to buy a vehicle without paying sales tax. For example, if you buy a car in Maryland, North Carolina, Iowa, or South Dakota, it's possible to skip the tax.
However, some of these states charge to use or excise taxes, which essentially serve as sales tax.
New and used cars are expensive enough today, and getting any discount on the sticker price is challenging. But the next form of sticker shock comes when the sales tax is included, and, after other fees, it can dramatically increase the vehicle's final sale price.
Each state sets its specific laws and rules regarding sales tax on vehicles. However, more than a handful of states have no sales tax on cars or no sales tax at all.
You'll pay sales tax if you live in a state such as Alaska or New Hampshire and buy a car or truck there. But a trip across the border could be worth it if your state charges sales tax, such as Utah, Massachusetts, or Pennsylvania.
Here's a rundown on sales tax for buying a new or used vehicle and how it’s possible to get a substantial savings from the dealership on the price of the vehicle.
States With No Sales Tax on Cars
As we mentioned, there are currently five states that don't charge sales tax on new or used cars: Alaska, Delaware, Montana, New Hampshire, and Oregon.
In many states, when a vehicle is registered, sales tax will be required in the state of registration if it was not paid at the time of purchase. For example, a car purchased in Oregon, but registered in Idaho, would have that state's sales tax assessed before the vehicle could be registered.
In this case, the only way to escape the sales tax is to purchase and register the car in Oregon. But the legality of this is iffy at best.
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 exact 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 as much as an additional 4.5%. In other words, you might pay a tax rate between 4% and 8.5% for the same car at the same sales price.
However, New York limits its vehicle sales tax to a maximum of $725. So a trip south to Delaware or north to New Hampshire might mean no sales tax at the time of purchase.
Florida Laws Benefit Buyers From States Without Sales Tax
People who live in states that don't impose a sales tax on vehicle purchases 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 purchasers would pay in their home states. This tax policy means residents of New Hampshire, Delaware, Montana, Oregon, and Alaska who find and buy their dream cars in Florida do not pay sales or use taxes in Florida.
When buying cars in Florida, Alabama residents pay only 2%, Colorado residents pay 2.9%, Hawaii and Wyoming residents pay 4%, and Louisiana residents pay 5% sales tax.
For residents of states with a tax rate higher than Florida, such as New Jersey, California, and Tennessee, Florida gives you a partial exemption. Buyers will pay a maximum of 6%, Florida's state sales tax rate. And in many of those states, it represents substantial savings.
But residents of Arkansas, Mississippi, and West Virginia who buy cars in Florida must pay motor vehicle sales tax to that state because their states do not give credit for taxes paid to Florida. Their home state's policies mean buyers have to pay taxes twice for their Florida car 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 Department of Motor Vehicles (DMV) or similar vehicle registration agency.
How to Claim the Florida Sales Tax Exemption
Nonresident buyers must apply for their exemption when the sale occurs. The buyer must submit Form DR-123, Affidavit for Partial Exemption of Motor Vehicle Sold for Licensing in Another State, whether the deal is through a dealer or a private individual. This form states the buyer's intent to license the purchased vehicle in their home state within 45 days of the purchase date.
The buyer gives the form to the dealer if the sale is through a 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 are Similar to Florida's
Typically, out-of-state residents who take delivery of a vehicle in Michigan must pay sales tax in Michigan. However, if you have the dealer or seller ship or deliver your car to an address outside the state, sales tax is only required if their state of residence requires it.
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 will not 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 an American-made Ford F-150, Chevy Tahoe, or Honda Civic in Michigan but plan on getting a title and registering it in one of the tax-free states, Michigan exempts your vehicle from their sales tax.
Michigan also exempts residents of the District of Columbia and 10 non-reciprocal states from sales taxation. These states are Oklahoma, Arkansas, West Virginia, South Dakota, Nebraska, 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.
What Is Sales Tax?
Sales tax is the fee state and local governments require vendors to collect from customers upon selling goods. Sales taxes differ from excise taxes, which are flat-rate taxes you pay when you buy a specific good, such as motor vehicle fuel or materials to make a product.
Some states like Maine also use an excise tax calculated based on the vehicle's value and a mileage rating, which is added to registration fees to pay for road maintenance.
To compute sales taxes on motor vehicles in most states that charge them, multiply the vehicle's purchase price by the applicable tax rate. Typically, the more money a car 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 state sales taxes. New Mexico charges a 3% car sales tax and 4% excise tax on all vehicles sold there, but it's sometimes lower than the sales tax depending on the county.
Other Ways to Offset Sales Tax
In many states, like Connecticut, Kansas, or Arizona, if you trade in a car to purchase another, only the difference between the trade-in value and the cost of the new vehicle is taxable.
Depending on the value of the vehicles, it may be financially prudent to trade in and avoid the taxes rather than sell to a private party for a higher price. Nevada uses a similar system where car buyers get a tax credit for the value of the trade-in times the tax rate.
Buying your new car is an exciting event and might be one of your most expensive purchases. Take full advantage of your money-saving position if you live in or near one of the states with no sales tax on cars.
Do the research, find the car you want, and make your best deal. Even one percentage point in sales tax can substantially change the price of a vehicle, and figuring out the policies of your state and nearby ones can save thousands of dollars on the selling price.