All states, except for Montana, Alaska, Montana and Oregon, require buyers to pay an auto sales tax when it's registered. State laws vary on how your sales tax gets determined, whether on the selling price before deductions or after. How the sales tax is collected depends on whether the buyer is doing business with a dealer or a private seller.
New Car Sales Tax
When you purchase a new car, you can expect to pay auto sales tax. The rate can be as high as 7% of the sales price, and your dealer will collect it from you at the point of sale. Some states allow you to pay taxes on a price that's lower than the sales price. For example, if you trade in an older car to purchase your new car, the dealer can deduct the trading value from the sales price and collect taxes on the difference. Some states may allow you a few more credits, lowering your sale price, and therefore lowering your taxes.
Used Car Sales Tax
There are two ways to pay a used car sales tax:
- To the buyer (if it's a dealer)
- To the Department of Motor Vehicles (DMV) when you get your registration
The amount you pay is based on the rate in your county. Call your county clerk or DMV to find out the rate and what (if any) deductions you can subtract from the selling price before applying the rate, since the rules vary from state to state. The DMV will require a "Bill of Sale" to calculate your taxes. This short document spells out the parties to the call sale, and the sales price.
Auto Sales Tax Deduction
As of 2009, you can claim a deduction on any auto sales taxes you paid to your state and other local government, up to $49,500. This applies to your 2009 tax forms, and not previous years, and the deduction is applicable to new cars only. The car or truck must have a bill of sale date after February 16, 2009. Also, this only works if you deduct your state income taxes as part of your itemized deductions. The rule for this deduction is that it's not possible to just deduct the sales tax. The sky is the limit to the number of cars you can deduct, as long as you meet these requirements.
Auto Excise Tax
You may have to pay an auto excise tax every year to your city or town government. It's typically based on a dollar amount per every thousand. For instance, a city may charge $25 per every $1,000 of the assessed value (not the market value) of the car. If you don't pay your auto excise tax, you may not be able to renew the registration on your car.
Knowing the rules for the auto sales tax that will apply for the car you want to buy will help you determine the price you'll pay. If you factor in the taxes ahead of time, you'll have enough money for both the purchase and what you'll owe to the state.