How to Calculate Used Car Sales Tax
Before buying a used car, most people like to know how much it costs, right? So, take note when you buy a used car, the price tag may not reflect your vehicle’s full cost. After your purchase, hidden costs like auto sales tax might catch you off guard. Learn how to calculate auto sales tax in advance so you won’t be surprised by an unexpected cost after the deal has been closed. While tax rates vary from state to city, the formula for calculating your vehicle tax is: buy price times the percentage of sales tax.
Do You Have to Pay Tax When Buying A Used Car?
Yes, when you buy a used car, you have to pay sales tax if you live in a state with sales tax. You don’t pay the tax to the person selling the car, though; when you register the vehicle, you’ll pay it to the DMV of your state. The state where the car is registered charges the sales tax, not the state where the car was purchased. For example, if you’re living in Massachusetts (a state with sales tax) but buying a car in New Hampshire (a state without sales tax), you’ll still have to pay tax to your Massachusetts home state.
Traveling outside the state to purchase a used car won’t save you from paying state sales tax. By contrast, if you live in a non-sales tax state (Delaware, Montana, New Hampshire, Oregon, and some parts of Alaska), you don’t have to worry about paying sales tax if you choose to travel outside the state for your next purchase of your car.
Sales Tax Example
The sales tax you pay is based on your municipality’s auto tax regulations and is not typically influenced by whether the vehicle is new or used. Assume that your sales tax rate is 6% and that the car’s purchase price is $20,000. Your sales tax would be $20,000x 6 %, equivalent to $1,200.
Price Discount Factors
Some factors lower the net selling price on which your tax is calculated. For example, if you trade in a vehicle, you subtract the trade-in allowance from the agreed-upon price in some states. Therefore, when negotiating your deal, it is usually better to consider your car’s value as a trade rather than to sell it separately where the allowance does not apply. Another common deduction is rebates. Some dealers offer discount incentives for a period of time to increase volume.
Suppose the dealer is offering you a $5,000 trade-in allowance on a $20,000 vehicle and you are taking part in a $1,000 rebate offer. The formula for calculating the sales tax base in this scenario is $20,000 minus the allowances of $5,000 and $1,000, which is equal to $14,000. Multiply your 6% tax rate by $14,000 and your total sales tax by $840. You saved $360 in sales tax by reducing your tax base.
Additional Cost Considerations
You pay the fees for vehicle registration and licensing in addition to sales tax. These fees are paid directly to the dealer as part of your sales agreement when you purchase through a typical dealership, and the dealership processes the paperwork. You file these documents with your local tax office on a private sale and pay at that point the tax, title and registration fees.
Once you calculate your auto sales tax, you will have a more comprehensive understanding of the full cost of buying your car and you can with greater confidence with the true price tag in mind.