To save money when buying your next vehicle, consider buying it in a state that doesn't charge sales tax. In the United States, each state has its own laws and rules regarding sales tax on vehicles. From the East Coast to the West Coast, Delaware to Oregon, there are more than a handful of states with no sales tax on cars.
If you live in a state such as Alaska or New Hampshire, and buy a car or SUV there, you will have to pay any sales tax on it. If your state charges sales tax, such as Utah, Massachusetts, or Pennsylvania, a trip across a state line or across the nation to non-taxing places might be worthwhile.
States With No Sales Tax on Cars
These five states do not charge sales tax on cars that are registered there: New Hampshire, Delaware, Montana, Oregon, and Alaska. Washington, DC, the nation's capital, does not charge sales tax on cars, either.
Some 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. However, some of these states charge use taxes or excise taxes, which serve the same purpose as sales taxes.
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. The Department of Revenue wants the money, regardless of the tax laws of the state in which the vehicle was purchased. A car purchased in Oregon, but registered in Idaho for example, would have Idaho sales tax assessed before the vehicle could be registered. In this case, the only way to truly skirt the sales tax is to purchase and register the vehicle in Oregon, which may not be legally allowed.
What Is 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 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 value of the vehicle 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 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 2020, while New Mexico charges sales tax on most goods, it charges a lower tax 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 is, the Empire State limits its vehicle sales tax to a maximum of $725. A trip from New York 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 do not 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, 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.
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 you money.
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 the Sunshine State, because their states do not give credit for taxes paid to Florida.
Their home state sales tax policies mean buyers get taxed 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 DMV.
How to Claim the Florida Sales Tax Exemption
Nonresident buyers must apply for their exemption when the sale occurs. Whether the sale 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 gives 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
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 an address outside Michigan, no sales tax is due 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 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 in the Wolverine State 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 titling and registering it in one of the sales tax-free states, Michigan exempts your vehicle from Michigan 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.
Other Ways to Offset Sales Tax
In many states, like Connecticut, Kansas, or Arizona, if you trade in a used car towards the purchase of another car, 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 the most expensive purchases you make. 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 car 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.