New and Used Car Sales Tax Costs Examined

June 22, 2012

Learn about the differences between new and used car sales tax, tax collection in private party transactions, and what you can expect to pay.

Drivers who are considering purchasing a new or used vehicle may be wondering about car sales tax cost. This additional fee is something a dealer does not always work into the equation, since car sales tax money is due directly to the state Department of Motor Vehicles. Here are some basics on figuring out your car sales tax liability.

What Is Auto Sales Tax?
Most states have an auto sales tax that is a straight percentage of the sale price. For example, a 2% on a sales tax on a $5000 purchase would come to exactly $100. However, many states have higher sales tax percentages like 4% to 6%.

Who Do I Pay Auto Sales Tax To?
It's important to note that the buyer always pays the car sales tax of his or her state of residence, regardless of where the vehicle was purchased. Expect your state DMV to require sales tax when you go in to register the vehicle.

Used Car Sales Tax in Private Party Deals
Whether you buy from a dealer, or directly from the seller through a used car classified ad, the DMV will require the buyer to have a bill of sale for the vehicle at the time of registration. This will show the sale price, and the DMV representatives will use it to assess sales tax. Since in the past, some buyers and sellers agreed to report a lower sale amount than the actual cash transaction, some states now require the sale price to be linked in some way to a blue book value for the vehicle.

Why Do Different States Have Different Car Tax Rates?

For those who are not used to selling or buying vehicles, some of the paperwork may seem a little strange, and that includes all of the issues related to state car tax rates. Most states require a sales tax for every vehicle transaction, with hardly any exceptions. This adds up to trouble for those who try to gift or donate vehicles, or sell them at low prices, without understanding state car tax requirements.

One thing that drivers notice when they come up against this kind of situation is that states can be extremely determined to get their car tax money from a new or used car sale. Another point of interest is that car tax rates are different in different states. For example, California car tax rates may not be the same as in Arizona car tax rate, or a tax rate for a vehicle sale in Colorado. Out on the East Coast, in states like Pennsylvania and Virginia, car tax rates also vary. Consumers who are new to automotive finance can find this all a little confusing.

Why States Have Different Car Tax Rates
The reason why each state has their own specific tax rate for cars is simply that each state has its own revenue base. Residents of a state pay taxes in that state. They are the captive audience for that state's tax policies. A state creates sales taxes, including car sale tax, according to its revenue needs and according to how its residents are represented in the state government. States have their own legislative bodies where representatives are elected by the people to use taxation responsibly, and that's where citizens can go to contest their state's auto tax practices or anything else that is part of state law.

Other State Car Tax Issues
Some states don't stop at having a car sales tax--they tax residents on their cars every year with an "asset tax" for vehicles based on the value of the vehicle. Using the registration records for that vehicle, the state or municipality sends taxpayers a bill each year.

In addition to these car tax differences, states also have many financial differences when it comes to auto insurance. What is mandatory for auto insurance in one state may not be the norm in another state. Some states even have radically different systems for administrating auto insurance, so that in some states, accident claims go through the courts, and in other states, they get paid on by insurance companies.

What all of this leads up to is that radical changes in car laws by state mean that what's appropriate for ownership in one state may be a liability in another. Households moving from one state to another can look at the various car laws of their destination state to see if they may want to rearrange their vehicle assets just a little. Knowing more about the laws of your home state will help you to first see car-tax situations and other financial liabilities related to your vehicle.

How Much Tax for a New Car Should the Buyer Expect?

When it's time to buy a new vehicle, tax for a new car can add thousands of dollars to the final purchase price of the vehicle. You should know how to calculate and estimate the amount of applicable taxes before ever going to the showroom or shopping online.

New vehicle tax comes in many forms and you should be aware of the average costs for all of them. Generally speaking, your state's DMV new car tax policy will determine how much you wind up paying in taxes. You will need:

  • A new car to purchase
  • The Sales and Use tax rate in your state
  • Title fee rates and fees in your state

This guide will show you how to come up with a good ballpark figure of how much tax you will have to pay.

Select a Vehicle Type

Figure out what type of vehicle is best for you. Think about whether you need a small passenger vehicle or something larger like an SUV or pickup truck. You should also think about price ranges for a vehicle, as the selling price will usually determine how much you pay in new car taxes.

Shop for the Best Price on the Car
Visit local dealerships and go online to search for prices on the particular make and model you're interested in. Always try to find the best deal possible, because the higher the selling price for the vehicle, the more you will be required to pay for new car taxes associated with the purchase.

Estimate State Sales or Use Tax
If you're not sure of how much the sales tax rate in your area is, contact a local business and ask them how much the percentage rate is that they charge to the customers. In fact, you can even call a local dealership and ask how much your local sales tax rate is. You will need the tax percentage rate in order to calculate how much sales tax you will probably have to pay for a new vehicle.

If you buy a new car from a local dealership, you'll have to pay state sales tax. Conversely, if you buy a new car online, and have it delivered from another state, you will probably be required to pay what is called use tax. Essentially, both taxes are the same but are simply referred to by different terms.

Inquire about Title Transfer Fees
Call your local Department of Motor Vehicles branch and ask them how much the fees are for applying for a new title, registration and license plate on a new vehicle. When inquiring about the costs, be sure to provide them with the exact year, make and model of vehicle you're interested in. They will then be able to give you a good estimate of how much the fees will be.

Sum Them All Up
After you know how much sales or use tax you will have to pay, and also have the amount for titling, registering and licensing the new vehicle, simply add the amounts together to come up with the total estimated amount you will need to pay in taxes if you buy a new car.

Tips for Lowering Your New Car Tax Costs

At the dealership when purchasing your new car, the overall price of the vehicle often increases quite a bit when they start to talk about the car tax costs. These costs can vary from state to state and include sales tax as well as vehicle registration fees and potentially a vehicle excise duty. These fees can add up quickly, however, there are some ways to qualify for lower tax rates, discounts and even rebates from the federal government.

Start Driving Green
The easiest way to be assured of a federal government tax discount is by shopping green. Hybrids, electric cars, alternative fuel vehicles and even diesel-fueled cars may qualify for a significant discount or rebate upon purchase.

Hybrid cars are becoming increasingly popular with most manufacturers. Since these green-driving machines have been around for longer than electric or alternative fueled vehicles, the tax discounts are not as high as at their inception, however, since the overall cost of the cars have decreased, it is still a great discount.

Currently, the largest new car tax discount will be available if you purchase an alternative fuel vehicle. These types of cars are those that do not run on traditional petroleum or diesel fuels and will increasingly become more readily available as more fueling options become widespread. Those who have purchased these cars have been able to file with the Internal Revenue Service for up to $4,000 in car tax discounts, which is at the highest rate for any tax discount in the country.

One of the more surprising car tax discounts is for the purchase of high-end European diesel vehicles. While the discounts are not as large as with the alternative fuel cars, it is still significant enough to be a worthwhile purchase. Even though diesel cars are not necessarily classified as green products, their ability to burn fuel at a greater efficiency creates more MPGs and allows them to nicely fit into this class.

Other Government Car Tax Discounts
Even if you are not planning to purchase a new hybrid or alternative fuel vehicle, there are still recent car tax breaks that you may qualify for. Recently, the federal government has placed incentives into legislation that will allow most Americans to receive a new car tax discount regardless of which state they reside in. The qualifications for these tax discounts are actually not difficult to obtain, as the criterion for qualification is rather broad. There are a few income restrictions, however, the cap for families interested in the tax discount are up to $250,000 per household. Another restriction is concerning the total price of the vehicle purchased which is capped at just under $50,000. If an individual or family purchases a car that is over that price, they will only receive a new car discount up to the price of the maximum limit.

How are Car Tax Prices Determined
Car tax prices are determined relative to the selling price of the vehicle. While a sales tax calculation may seem like a straightforward one, car tax prices are calculated differently depending on whether the vehicle is financed or leased. Additionally, depending on your jurisdiction, the rebates and incentives offered by manufacturers may or may not be taxed. It is simply a matter of local regulations. In any case, whether or not you use an online car tax calculator, determining the amount of tax due on an automobile transaction is easy, as long as you have the necessary information. Manually calculating the car tax price for a vehicle you are considering is an easy way to check the dealership's math and make sure you are getting the best deal possible.

  1. Get the selling price and doc fee. The first step to calculating car tax is to get the selling price and documentation fee being charged by the dealer. The documentation fee is always taxed, if one is charged. Additionally, if the vehicle you are considering has accessories added after the vehicle was assembled at the factory, these aftermarket options are also added to the selling price, and are likewise taxed.
  2. Find the trade difference rule. In some states, consumers must only pay auto tax on the difference between the price of their new vehicle and the value of their trade in. In effect, this lowers the sales tax due. For example, if a consumer buys a $20,000 truck but their trade has a value of $11,000, they are taxed only on the $9,000 difference. Contact the dealership of a local Department of Motor Vehicles office to learn about the regulation in your area. In some states, the trade difference rule is only offered on new cars, while in others it is offered only on used cars.
  3. Learn about rebates. Contact your local Department of Motor Vehicles or a trusted dealership to find out whether or not rebates are taxed in your state. If rebates are not a taxable item, the discount coming by way of rebate is subtracted directly off the selling price that you researched in Step 1. If rebates are taxed, do not factor them in at this point, as the rebate amount will be subtracted off the "bottom line" price that is inclusive of all taxes and fees.
  4. Complete the calculation. For our purposes, this example considers a $37,000 Mercedes-Benz C-Class that has a selling price of $36,000. The vehicle is being purchased in Michigan, which has a 6% sales tax rate, requires tax to be paid on rebates and does not offer a trade difference rule. The dealership charges a documentation fee of $150. There is no rebate on the vehicle. To calculate tax, simply add the selling price ($36,000) and the documentation fee ($150). The total taxable amount is $36,150. Next, multiply this amount by the 6% Michigan sales tax. This determines the sales tax amount to be $2,169.

Some Things to Remember about New Car Taxes

First of all, for the most part, you are going to have to pay them. The percentages vary from state to state but there is really no way of avoiding them with some very few exceptions.

Second, most states include a vehicle excise duty that is sometimes referred to as a road tax. This also may be included in your state's vehicle registration fee as a one-time payment. Either way, it is still not listed on the sticker price of your new car.

Third, if you purchase your car online, the sales tax that you will be required to pay is not based on the rate which is standard in the state where your car was originally purchased, it is ultimately based upon the tax criteria of the state where it will be finally registered. Fourthly, utilize online websites that have tax calculators for your state. They are easy to use and will give you a better idea about what to be prepared for financially when you get to the dealership. Use CarsDirect to help you get started.

Lastly, contact the Internal Revenue Service after purchasing your new vehicle. Recently there has been new legislation that might help you waive all of your sales tax or new car tax completely. Then you will be able to ignore section one and use the savings for increasing fuel prices.

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