Whether you buy a vehicle from a private seller or a dealership, you’ll need to pay sales tax on a used car just as you do a new vehicle. How much you pay in taxes depends on where the car will be registered, the car’s value, and other state tax specifications on car purchases.
So how can you avoid sales tax on a used car? Learning the ins and outs of sales tax on used vehicles could help you save thousands of dollars on your next used car purchase. Find out how you can legally avoid paying tax on a used car in 2022.
Do You Pay Sales Tax on a Used Car?
Depending on where you live, you will have to pay sales tax on your used car purchase the same way you would for a new car. The sales tax rates vary, ranging from 2% in Alabama to over 8% in Nevada. Five states have no sales tax on vehicles: Oregon, New Hampshire, Montana, Delaware, and Alaska.
Example: Alex purchases a car for $20,000 in West Virginia. West Virginia has a tilting sales tax of 6%. Alex will pay $1,200 in taxes.
How Sales Tax on Used Vehicles Works
The sales tax on used vehicles is collected by the Department of Motor Vehicles of the state you are registering the vehicle. If purchased from a dealership, the sales tax on vehicles is often included in the price and the documentation confirming the transfer of ownership.
If purchased from an individual, or in the case where sales tax was not paid along with the purchase price, you will need to pay the sales tax at the DMV by presenting the bill of sale. You are then able to register your vehicle.
Example: Tom buys a car from his coworker for $15,000, and the sales tax is not included in the price. Tom will need to go to the DMV with the bill of sale stating how much the car was sold for to pay the tax and register the vehicle in his own name.
7 Ways to Legally Avoid Paying Sales Tax on a Used Car
Most states require sales tax for transferring a used car, but there are ways to legally avoid paying it. These options are not available to everyone, but in some circumstances, you can avoid paying a large sum of money.
1. Live in a State Without Sales Tax
Certain states have no sales tax for car purchases, making these states ideal for buying used cars. Purchasing and registering the vehicle in one of these states is the easiest way to avoid a sales tax on a used car.
Example: Sarah buys a car for $12,000 in Delaware, which has no car sales tax. She will only pay $12,000 for the car. Aaron buys a similar car for $12,000 in Texas, where the used car sales tax is 6.25%. Aaron will have to pay the Texas DMV $750, making his total purchase price $12,750.
Which States Do Not Have a Sales Tax on Used Cars?
There are a total of five states that don’t charge tax on cars: Oregon, New Hampshire, Montana, Delaware, and Alaska. But when looking for vehicles in these states, compare prices on similar cars in other states with sales tax. Sellers in tax-free states know buyers won’t have to pay sales tax, so they may price their vehicles higher.
It may be possible to purchase a car in a state with sales tax while registering it in your tax-free home state, resulting in a lower price.
2. Buy a Vehicle in Montana Using an LLC
Montana has no sales tax on used cars, making it ideal for those who want to save money on purchasing a vehicle. To take advantage of the no sales tax, you must live and register the car in the state. It’s possible to purchase a vehicle tax-free if you have an LLC registered in Montana.
Because this strategy is complicated, time-consuming, and a potential legal gray area, you may want to consult a professional when attempting this. It may only be worth it for expensive vehicles with a large tax bill.
Example: Rob, who lives in California, wants to purchase a high-end vehicle in Montana but is not a resident. He sets up an LLC by paying $70 for the filing fee for the Articles of Organization, $50 for a state fee, $130 per year for a registered agent who resides in Montana, and $100 for someone to handle the paperwork for the LLC.
Rob purchases his car for $100,000 and pays zero in sales tax but $300 to set up his LLC and $130 per year to keep it running thereafter, which is much less than the $7,250 he would have paid in taxes in California.
3. Purchase a Vehicle Before Moving
If you live in one of the tax-free states or in a state with low sales tax on cars, and you are moving to a high-tax state, you can avoid paying sales tax to your new state by purchasing a car within 90 days of your move.
You will need to purchase your car and register it in your current state. Then, once you move, you can transfer the registration without needing to pay the tax in your new state. This could save you thousands of dollars if your new state has higher taxes than your current state. But remember, this does mean paying two separate registration feeds: one in the current state and one in the new state.
Example: Molly lives in Montana, where the sales tax is 0%. She plans to move to Nevada, where the sales tax is 8.3%. Ninety days before she moves, she purchases a car for $20,000 and registers it in Montana without paying sales tax. If Molly had bought a similar car for $20,000 in Nevada, she would have to pay $1,660 in taxes, totaling $21,660.
4. Join a Car Buying Service
A car buying service can help you with the purchase of a new car and the sale of your old one if you don’t have time to shop around, visit dealerships, or are fearful of haggling with pushy salesmen. Various companies exist from Carvana to TrueCar but some banks like Navy Federal and Capital One have similar services. With a car buying service, you can trade in your current car to lower the sale price of the car you want to purchase. In almost all states, you can legally reduce your sales tax on a car by trading in your current one. The sales tax on your new (to you) car will then only be on the difference between the trade-in value and your purchase price.
Washington, D.C., California, Hawaii, and Virginia do not provide a sales tax credit on trade-ins. The downside to this is you may not be getting the full amount for a trade-in that you would get if you sold the car outright.
Example: Eve is using a car buying service to help her negotiate the purchase of buying a used car in Arizona from a dealership worth $30,000. She is trading in her current car for $10,000. Eve will only have to pay the 5.6% sales tax on the remaining $20,000, which comes to $1,120. If Eve didn’t trade in her vehicle, she would have had to pay the tax on $30,000, which would have come to $1,680.
5. Buy in a State With Lower Sales Tax
Each state has a different sales tax for the purchase of a used car. Some will have no tax; others can be as high as 8.3%. However, purchasing a car in another state does not always solve the problem of sales tax since you are required to pay the sales tax in the state you reside and register the car in.
Even if you can prove you paid the sales tax in another state while registering it in your home state, the local DMV or tax agency may make you pay the difference in tax rates.
However, some states do have reciprocity agreements that allow buyers to purchase a car in the state at a different tax rate from their own without needing to pay the difference at their own DMV. But these agreements are for very few states and don’t always apply to car purchases.
6. Negotiate With a Dealer to Eat the Sales Tax Cost
Car dealers often include sales tax in the purchase price of a car. Depending on the vehicle you’re buying and the dealership you’re at, you can negotiate the price down. This doesn’t necessarily change the sales tax or make it go away, but a lower price means you’re paying less in taxes. Also, depending on how low you can talk the dealer down, you may pay significantly less overall. You may also be able to refinance an auto loan to get a lower total price,
Example: Tony lives in Georgia and is shopping for a car valued at $32,000. If he purchased the car at full price, he would pay $2,112 in taxes at the state tax of 6.6% for a total of $34,112. If Tony can talk the dealership down to $30,000, Tony will pay $1,980 in taxes for a total of $31,980.
7. See if You Qualify for an Exemption
Depending on the state, you may be entitled to exemptions from sales tax on used cars. For example, common exemptions in Nevada include:
- The vehicle was given to you as a gift
- The car was sold to you by a family member
- The owner is a disabled veteran
- The owner is a veteran with certain dates of service
- The owner is a surviving spouse of a disabled veteran
- The owner is active duty military and a resident of another state (and the car was purchased in another state).
- The owner is blind
Check with your state to find out what exemptions may apply to the purchase of a used car.
Example: Tina’s mom sold her a car for $5,000. In Nevada, Tina won’t have to pay tax on the purchase of the vehicle.
What is the Average Sales Tax Rate on Cars?
The average sales tax on a used car is 5.75% in the United States. There is variation in sales tax by state, but the range ranges from 0-8.3%. Besides the five tax-free states, Alabama, Colorado, Oklahoma, and North Carolina have some of the lowest rates in the country, while Nevada, California, Rhode Island, and Kansas have the highest.
Is Sales Tax on a Car Based on Where You Live or Where You Buy the Car?
Sales tax on a car is based on where you live, not where you purchase the car. When registering the vehicle with your state DMV, you will pay the sales tax.
Do You Pay Sales Tax on a Used Car From a Private Party?
Yes, if your state has a sales tax, you must pay it on a used car, even if it’s from a private party. While it depends on the state, you will most likely need to pay the Department of Motor Vehicles or other government agency before registering the car.
Where Do I Pay Sales Tax on a Used Car?
Where you send the payment for sales tax on a used car will depend on your state. Make sure to send it to the proper government authority and the required documentation.
Where Do You Pay Sales Tax on a Used Car in California?
The sales tax on a used car in California should be sent directly to the California DMV.
Where Do You Pay Sales Tax on a Used Car in Texas?
Texas requires the sales tax on used cars to be sent to the local county tax assessor-collector’s office.
Where Do You Pay Sales Tax on a Used Car in Florida?
In Florida, the sales tax can be paid online with the Florida Department of Revenue.
Where Do You Pay Sales Tax on a Used Car in New York?
New York, like California, requires the sales tax to be paid to the New York DMV.
Is Sales Tax on a Used Car Tax Deductible?
It’s possible to deduct the sales tax on a car no matter if you purchased it from a dealership, a private seller, or if it was new or used. The sales tax can only be deducted in the year you purchased the vehicle, even if you included the sales tax in the car loan and the tax payments are spread out in financing
The IRS lets you deduct the sales tax by using a Schedule A on Form 1040 just as you would deduct property taxes. However, you are only allowed to deduct state sales tax and not any additional taxes imposed by a county or local government and you can only deduct up to $10,000 in total taxes (personal property taxes, real estate taxes, etc.)
Example: Erica bought a car in 2022 for $25,000 in New York with a 4% sales tax. She can deduct the $1,000 she paid in tax on her Schedule A on Form 1040 in line 5a.
How to Calculate Sales Tax on a Used Car
Calculating sales tax on a used car can be as simple as multiplying the car price by the tax rate. But, because prices often change or are different than marked, and the tax rates differ, there are a few steps to follow to ensure you get the correct price.
Step 1: Find the net price of your vehicle
Include all fees listed, including registration fees a dealership might include in the transaction, and subtract any trade-in discounts or other reductions you may have (if your state allows trade-in reductions on overall tax price).
Step 2: Find the auto sales tax rate for your state and city
Each state has a different sales tax rate, but some counties and cities have additional tax rates for vehicles on top of the standard rate.
Step 3: Multiply the net price by the vehicle sales tax percentage
If your tax rate is 5%, remember to multiply by .05 to get the correct number.
Example: If you buy a used car for $32,000 in the state of Florida, you will pay a 6% sales tax. Multiply 32,000 by 0.06 to get $1,920. That is the sales tax on the used car in Florida.
Does a Trade-In Reduce Sales Tax?
Yes, trading in a vehicle will reduce your vehicle’s price and the sales tax you must pay in all states except California, Hawaii, Virginia, and Washington, D.C.
Example: Matt wants to buy a $32,000 car in Florida. He is offered $12,000 for his current vehicle and will have to pay the $20,000 difference. Matt will only have to pay the sales tax on the $20,000, which is $1,200, and not the entire $32,000, which would come to $1,920, saving him over $700 in taxes.
What Determines the Total Sales Tax on a Used Car?
The total sales tax depends on the price you pay for the vehicle and the sales tax percentage of the state you live in. Some cities and counties may have additional fees for the sale of used cars.
Vehicle Value
Vehicle value is the primary determinant of the total sales tax. The higher the cost of the vehicle, the more the tax.
Example: The New York car sales tax rate is 4%. A car purchased for $32,000 would have a tax of $1,280, while a car purchased for $20,000 would only have a tax of $800.
State of Residence
State of residence is another major determinant of sales tax. Each state has the right to determine what percentage will be taxed. States with higher rates will have higher taxes.
Example: A car purchased for $20,000 in New York will have a sales tax of $800, while a car purchased in Alaska will have no tax since its sales tax percentage is 0%.
Your City and County of Residence
Some cities or counties may require additional fees for the purchase of a vehicle on top of the state sales tax.
Example: Nevada has a state-wide minimum sales tax of 6.85%, but Clark County, where Las Vegas is located, adds on another 1.45% to bring the sales tax for residents of Clark County to 8.3%
FAQs
Here are the answers to some common questions about sales taxes on a used vehicle.
The buyer pays the sales tax on a used car when they register the vehicle. When buying from a dealership, the vehicle is usually registered at the dealership, with the sales tax included in the total price.
Yes, whether you pay for it or transfer it to a company if your state requires a sales tax.
In most cases, no. You will be required to register the vehicle in your state and pay the sales tax associated with your state.
Yes, intentionally falsifying information regarding taxes is a felony in most states.
No, you can purchase the vehicle in any state, but it must be registered in your state of residence.
Yes, you will still have to pay sales tax on a car when you register it at your DMV.
It depends on the state you live in. Many states allow you to gift vehicles to children and spouses but not extended family.
