Quick Facts About Taxes Car Buyers Pay
- Car sales taxes are common, and while the tax rates vary, proceeds typically fund public services.
- Use taxes on vehicles usually apply when you plan to drive a vehicle in a state other than where you purchased it.
- Instead of — or in addition to — taxes collected at the point of sale, car buyers face registration and ownership fees.
It’s crucial to consider all the associated costs and stay within budget when you shop for a car from a dealership or a private seller. This includes the unavoidable: taxes.
Various taxes may apply when you purchase a vehicle. The exact amounts depend on where you live and the total cost of the car. Below, we’ve outlined different taxes you should know about. Understanding these can help ensure you’re more informed as a buyer.
Sales Tax
Sales tax is the most common tax car buyers face.
The tax is added to the sale of most goods and services in the United States and usually helps fund public services like schools and fire departments. This kind of tax is based on the price of the vehicle before any dealer, registration, or other fees are added. The rate varies by state. Also, some county or local governments may levy a vehicle sales tax.
For example, California’s statewide sales and use tax rate is currently set at 7.25%; however, that does not include any additional district taxes that may apply. While the dealer is responsible for reporting the taxes, the applicable levies are based on where the vehicle is registered, not where it’s sold. These district tax rates can add an extra 0.10% to 1% to the overall sales tax, and some residences may be under more than one district tax.
As of this writing, the following states do not impose a sales tax when you buy a car:
- Alaska
- Delaware
- Montana
- New Hampshire
- Oregon
The above states still have other vehicle registration and ownership fees to consider. For example, Delaware requires a 4.25% “document fee,” based on the purchase price or the vehicle’s value, whichever is greater. In general, sales tax — or a fee collected when you register the car — can significantly impact the total cost of your new vehicle. Keep this in mind when building your budget and starting the shopping process.
Who Pays Sales Tax When Selling a Car Privately?
When you sell a car privately, the buyer is responsible for any applicable sales tax. The tax amount, along with any associated fees, will be collected at the time of title transfer and registration.
RELATED: Things to Know About Taxes When Selling a Car
Excise Tax
Another tax to be aware of when buying a car is the excise tax. Some states, regions, and municipalities may levy an automotive excise tax to help fund infrastructure projects and expenses, like road maintenance or public transit. In some cases, the dealer or retailer pays the tax to the government agency, but those costs are transferred to you as the buyer. Other jurisdictions may collect the excise tax when the vehicle is registered.
Rates and regulations vary depending on the vehicle purchase price or a portion of the vehicle’s value. The assessment typically is lower than a local sales tax rate. In Massachusetts, every resident who owns and registers a motor vehicle must pay the tax collector annually, and each vehicle is subject to taxation, “whether registered or not, is subject to taxation, either as excise or personal property, for the privilege of road use, whether actual or future.”
Vehicle Use Tax
Use tax generally applies when you plan to drive a vehicle in a different state than where you purchased it. Each state calculates rates differently based on the purchase price. Your local Department of Motor Vehicles (DMV) will collect payment at the time of registration.
Here are the rates in a few states that impose a use tax on vehicles purchased outside state lines:
- California — 7.25%
- Kentucky — 6%
- Louisiana — 4.45%
- Maryland — 6%
- Michigan — 6%
- Oklahoma — 4.5%
- Oregon — 0.5%
Rates and regulations on use taxes can be very specific depending on how you use the vehicle. Counties and municipalities may levy additional taxes when you buy a car. Contact your local DMV if you need clarification of all fees before purchasing.
Property and Ad Valorem Tax
Some states impose a property tax on vehicles in place of (or in addition to) a standard sales tax. Owners usually pay upfront or during the annual registration renewal. The property tax rate can vary from state to state and is assessed as a percentage of the vehicle’s value.
Also known as an “ad valorem” — Latin for “according to value” — tax, some states, including Georgia, charge this at the point of sale. Overall, this tax is important for vehicle owners and buyers to consider. If you’re required to pay annually, the levy plays a part in how much it costs to drive and maintain your car year after year.
The following states include property or ad valorem tax when you purchase a vehicle:
- Georgia
- South Carolina
- Alabama
- Mississippi
- North Carolina
In some cases, taxpayers may write off property tax and ad valorem tax on their federal income tax return when itemizing deductions. The deductible limit may fluctuate, so consult a certified public accountant for the most accurate and up-to-date information.
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Editor’s Note: This article has been updated since its initial publication.
What about “documentation” fees? Several states, including Pennsylvania where I am, allow dealers to tack on a documentation fee to cover their paperwork costs! Seriously? I’ve had two different dealers tell me that the state of Pennsylvania “mandates” this fee. It’s a complete lie. I even checked it on PA’s official penndot site. It’s an optional fee dealers are permitted to charge, but it’s definitely not mandated. It’s also negotiable and it’s capped by the state at $474.
If the vehicle is titled and registered in new jersey, you pay the sales tax in new jersey.
If vehicle purchased in Connecticut and used in NJ is there a “use tax? Also is there a property tax or a sales tax imposed ? Is it annually?
thanks for reading, Claudette. Tax is paid to the state where the car is registered. If the car has a Connecticut registration, there is no need to be concerned about New Jersey’s car sales tax rate, which is 6.625%. If you regularly garage the car in New Jersey, you might consider transferring the registration. You only pay a registration fee, not the NJ sales tax, if you transfer the existing registration from Connecticut to New Jersey.