You’ve found a great deal on a used car and decide to go for it. But then, the dealer gives you a paper showing all the fees and monthly payments, and the final cost is a lot more than the sticker price you got excited about. What happened?
Paying sales tax may not seem like much when buying a $25 sweatshirt. But when you’re making a larger purchase, like a car for tens of thousands of dollars, the sales tax can add up.
So are there any ways to legally avoid paying sales tax on a car?
We’re here to show you how, in some cases, you can avoid paying sales tax on a car. And if the tax is something you’re just going to have to pay, we’ll show you how to lower it and save money.
Can You Avoid Paying Car Sales Tax?
You can legally avoid paying sales tax on a car in certain cases, but they are rare. (We’ll get to how in a minute.)
For the most part, when you purchase a used or new vehicle, – whether you’re paying out-of-pocket, with an auto loan, from a dealership or a private party – you’ll have to pay sales tax. How much sales tax depends on the car’s price and where it’s registered.
How Can You Avoid Sales Tax?
Chances are, you’re not going to be able to get out of paying tax on either a used or new car, including if it’s a private sale. And in most states, you’ll even pay sales tax when leasing a car. Here are a few ways to legally avoid paying sales tax:
Live in a state without sales tax
One way to get out of paying sales tax on a car is to live in a state that doesn’t charge sales tax. These states are Alaska, Delaware, Montana, New Hampshire and Oregon.
If you live somewhere else, you won’t avoid sales tax by buying the car in one of those states. The amount of tax you pay is determined by where the car is registered, not where you buy it.
For example, if you buy a car in a state with no sales tax, you’ll still have to pay your home state’s sales tax, plus whatever tax might be charged by your local government. Most dealers make this easy by charging your state’s proper tax right when you purchase.
So in order to take advantage of a state that doesn’t charge sales tax on cars, you’ll have to live there. And even so, this doesn’t mean you won’t pay any sales tax.
That’s right. A local government can add its own sales tax to a state’s sales tax. So you might pay no state sales tax if you live in a state without it, but pay a county sales tax if your county has one.
Be eligible for sales tax exemptions
There are some instances where you can avoid vehicle sales tax, even if you don’t live in a no-sales-tax state. In most states, you can avoid the tax:
- By buying a historic vehicle
- If the car will be used for agriculture or forestry
- If the vehicle owners have disabilities
- If the car was purchased from a family member
How Can You Lower Sales Tax on a Vehicle Purchase?
You can save money on your car’s sales tax, and by extension your monthly car payments, without these exemptions or moving to a no-tax state, county or city. Here are some ways to save on sales tax:
Negotiate your purchase price
You may have more leeway negotiating the price with a private seller, but don’t give up if you’re buying from a dealership.
The amount of sales tax you pay is based on the car’s price. If the sales tax rate is 5% and you’re purchasing a car with a sticker price of $30,000, you’ll pay $1,500 in sales tax (.05 x $30,000 = $1,500). But if you can get the dealer to lower the car’s purchase price to $25,000, the tax will be lowered to $1,250.
Trade in a vehicle
Trading in your old vehicle can lower the cost of the car you’re buying quite a bit, depending on the trade-in value. This can help lower the amount of sales tax you’ll pay.
Let’s say the car dealer gives you a trade-in value of $10,000 for your old car, and the car you’re purchasing is $25,000. You’ve now lowered the sales price of that car to $15,000. With a sales tax rate of 6%, you’ll now pay only $900 in sales tax.
If you purchase an all electric vehicle (EV) or plug-in hybrid vehicle, you may be eligible for up to $7,500 in federal tax credits. This gets subtracted from the amount of income taxes you owe, so you’ll either owe less or get a bigger refund.
Additionally, your state may have its own incentives on top of the federal one. Check this list to see if your state offers additional tax benefits for electric cars.
Don’t Let Sales Tax Slow You Down
There are legal ways to avoid sales tax on your car purchase, but they are difficult to come by. Before you try, be sure to check your local tax authority or department of motor vehicles (DMV). And try to save money on your car in other ways.
U.S. Department of Energy. “Federal Tax Credits for New All-Electric and Plug-in Hybrid Vehicles.” Retrieved July 2022 from https://www.fueleconomy.gov/feg/taxevb.shtml