Sales tax on used cars can raise the price of a car considerably. So, you’re naturally wondering how to legally avoid paying sales tax on a used car. The good news is there are ways to avoid paying sales taxes. For example, you can buy a car in another state, purchase it from a family member, or get an antique. Each state has different tax exemptions, so be sure to do thorough research to see which yours has.
If you’re looking to get a car but are on a budget, you may decide to get a used vehicle. These can be much cheaper than newer models and can help you save a few bucks. But there are so many more expenses to a car than just the sales price. Whether you buy a new vehicle or an old one, you’ll likely have to pay for a loan, auto insurance, registration fees, and car sales tax. These fees add up, and suddenly that used car isn’t looking so affordable anymore. So what can you do to make it a little cheaper? Try seeing if you can avoid paying sales tax.
Sales tax can dramatically increase the price of a car, and you may think it’s inevitable. But there are a few ways you might be able to avoid paying sales tax. This article outlines these ways and gives a brief rundown of what sales tax is. Keep reading to see how you can get that car you want for a better price.
What is sales tax?
Sales tax is a tax paid to the government for the sale of goods and services. The state you buy the goods in determines how much you pay in sales tax. In some cases, the county, city, or municipality where you make your purchase could also influence your vehicle sales tax.
Sales tax on cars is applied during the purchase, leasing, or ownership transfer of the vehicle. The tax amount will depend on where you buy the car. Some states have lower sales tax rates than others, and five states don’t have one at all.
What is sales tax based on?
When you have to pay sales tax on a car purchase, the rate you pay will be determined primarily by three factors: the vehicle’s purchase price, where you make your vehicle purchase, and where you live. Why car prices matter for sales tax is obvious if you’ve ever bought anything taxable. So let’s look at the other two factors.
Where you buy the car
The tax rate you pay is determined by where you purchase the car. As mentioned before, some states and localities have lower sales tax on cars, and others have no sales tax.
Where you live
Depending on where you live, you will have to pay the sales tax on your used car, even if it was purchased in a state with no or lower sales tax. Laws differ in every state but, typically, you will need to register the car in the no-sales-tax state and then re-register in the new state after a minimum period of time to avoid paying sales tax. However, to register a vehicle in a state you usually need to live or have a business there. This has to be legitimate. Using dummy addresses or fake companies in a no-sales-tax state will not fool revenue departments.
Whether or not you find a way to avoid paying sales tax on your car purchase, you may need financing. SuperMoney’s auto loan search tools can make finding the right car loan painless. Well, as painless as spending money can be, at any rate.
Can I legally avoid paying car sales tax?
Failing to pay taxes is tax evasion. This can lead to some serious legal troubles you want to avoid. But, if you don’t want to pay car sales tax and want a new car, there are some legal ways to do this.
Ways to avoid paying sales tax on cars
There are a couple of specific ways you can avoid paying sales tax on a used car.
Buy a car in a state with no sales tax
One easy way to save money on sales tax when buying a vehicle is to live (or move to) a state with no sales tax. While most U.S. states charge sales tax, the sales tax varies in each one. A few don’t charge sales tax at all. The states with no sales tax are:
If you live near one of these states, you may have thought about making the trip to buy a car there and avoid the sales tax. Sadly, that will only postpone the payment of taxes. You might avoid paying sales tax at the time of the purchase, but you will usually have to pay sales tax later on.
Rules vary by state, but typically you have to register and use the car in the no-sales-tax state for some time for it to work. In the case of California, you have to pay sales tax when you register the car unless you purchased, and used, the car outside of California for at least 12 months. The taxes you owe will be based upon the purchase price of the car, minus whatever sales tax you paid to another state (source).
Note, however, that lack of statewide sales tax does not mean you can buy a car tax-free in all locations. The statewide average for local-area sales tax in Alaska, for instance, is 1.76%, and you could pay up to 7.5% in some locations. (These are general sales taxes reported by the Tax Foundation in January 2022.)
If these states aren’t an option for you, there are some with a lower sales tax on cars. States with a tax rate below 5% are:
You will still have to pay sales tax here, but it will be lower than in other areas. Again, these are statewide sales tax rates as of January 2022. Local rates may be higher in areas of each state. And some states may modify the sales tax for cars relative to the general sales tax.
Utilize sales tax exemptions
Sales tax exemptions on used cars vary by state. For example, California residents can receive sales tax exemptions if:
- The car was a gift
- They received the car because of a court order
- They inherited the car
While these are specific to California, there are some tax exemptions that are present in most areas of the U.S.
4 types of car sales tax exemptions
These are a few examples of tax exemptions that can be found in multiple states:
Sold between family members
If your sibling is selling a used car, you may want to jump on the opportunity and buy it. In many states, including California, you can get a tax exemption when the car you buy is sold to you by any of the following: a parent, grandparent, child, grandchild, sibling, spouse, or domestic partner.
Motor vehicles made before 1973 may be eligible for exemptions on car sales tax.
Disabled car owners
Most states offer sales tax exemptions on cars that are modified for a disability. So, if you or your loved ones have a disability and need a modified car to get around, you likely won’t have to pay sales taxes on it.
Agricultural and forestry
In some states like New York and California, used vehicles purchased for farming, forestry, or agriculture might get a sales tax exemption.
How to claim sales tax exemptions
You will likely have to keep your receipts and fill out some paperwork in order to claim your tax exemption. Your local government website can provide you with these documents. A mailing address should also be provided. A tax firm may be able to help you, as well.
A way to save money that works in all states
In some cases, paying sales tax is simply unavoidable. However, there are other ways to save money on a car purchase. For example, you can lower your financing costs if you’re buying the vehicle with an auto loan. The average used car is around $30K. So, if you’re financing that with an 8% APR (60-month term) auto loan, that will cost around $36,500. The same loan with a 5% APR, will save you around $2,500.
If you already have an auto loan consider an auto refinance.
How do I avoid sales tax if I buy a car out of state?
Purchase a vehicle in Alaska, Delaware, Montana, New Hampshire, or Oregon. These states do not have state sales tax. Ideally, you should also find a city, county, or municipality that does not charge a sales tax, since local sales taxes negate some of the benefits of buying in tax-free states.
How to legally avoid paying sales tax on a used car in California?
Buying a car from a close family member is one of the easiest ways a California resident can avoid paying sales tax. Californians can also do research to see if vehicles they wish to purchase are eligible for any tax exemptions.
Do I have to pay taxes when I sell my car?
If you sell a private car, you do not have to pay taxes. The buyer is responsible for paying sales tax, but not the seller.
- You can avoid paying car sales tax by applying for tax exemptions or buying a car in a state with no sales tax.
- Alaska, Delaware, Montana, New Hampshire, and Oregon are the only states with no sales tax.
- You might not have to pay sales tax if you buy a car from a family member.
- If your car needs to be remodeled to accommodate a disability, you may not have to pay sales taxes.
You’ve got this
Car sales taxes can be expensive, so it’s worth finding ways to save money on this. See if you can buy a car in a neighboring state with lower or no sales tax. You can also see if you are qualified for a tax exemption on your car. It may not be easy to completely avoid paying sales tax, but it is possible. You now know what you need to know and are ready to make it happen.
So, are you looking to buy a new car soon? SuperMoney’s advanced search tools, filters, and unbiased real-customer reviews make finding car financing easier than ever. Check out the best auto loans for buying used cars this year.
View Article Sources
- Alaska Sales Tax Information — Alaska Office of the State Assessor
- Buying a Used Car — Federal Trade Commission
- Domestic Partners Registry: Frequently Asked Questions, Question 1 — California Secretary of State
- Exemptions & Exclusions: Vehicles, Vessels, Aircraft – Frequently Asked Questions (FAQs) — California Department of Tax and Fee Administration
- Sales tax and use tax rate on motor vehicles — Washington State Department of Revenue
- State and Local Sales Tax Rates, 2022 — Tax Foundation
- How To Get The Best Deal On A Used Car — The Super Guide — SuperMoney
- How to Buy a Used Car from a Private Seller: 5-point Checklist — SuperMoney
- Ultimate Guide to Classic Car Loans — SuperMoney
- Best Auto Loans for a New Car in 2022 — SuperMoney
Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.