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Do I Have to Pay Tax on a Used Car?

Finance | 07/29/2023 21:01

When buying a car there are a number of additional expenses that we will be required to pay on top of the vehicle price, and one of those expenses is sales tax. Whether it is new or used, sales tax is required by most states and should be factored into your car buying decision.


Here’s how sales tax works when buying a used car.

What is sales tax?

Sales tax is a percentage-based tax that is imposed on goods and services. In the United States sales tax is charged and collected by the states. What goods and services are taxed depends on the state where the purchase is made. There are some exceptions to sales tax that broadly include:

  • Groceries

  • Prescription medicines and certain medical devices

  • Sales of items paid for with food stamps

  • Sales to the US government


In general most retail items that you purchase, including buying a new or used car, requires that you pay sales tax.

How much is used car sales tax?

Sales tax varies widely from state to state. If you are lucky enough to live in one of the five states where there is no sales tax–Alaska, Delaware, Montana, New Hampshire, or Oregon–then you will not be required to pay sales tax when buying a used car. For the remaining 45 states the sales tax ranges from 2.9% (in Colorado) to 7.25% (in California). 


Some jurisdictions have local sales tax requirements as well. For example, while Alaska has no state sales tax, certain areas have a local sales tax.


It is important to note that sales tax is paid in the state where the car is registered, not necessarily the state where the car is purchased. There are eight states that allow nonresidents to register cars: Delaware, Indiana, Kentucky, Maine, Massachusetts, New York, North Dakota, and Pennsylvania. But this can create issues down the line when you insure your car, as you need to register and insure in the same state. It’s much simpler to register where you live and avoid the hassle.

How can I calculate used car sales tax?


Sales tax on a used car is based on the price of the car. A dealership will calculate this for you, but if you are buying from a private seller you may need to do the math yourself. To calculate the sales tax you can take the following steps.

  • Convert your state’s sales tax to a decimal by dividing it by 100. For example, if your state’s sales tax is 6%, 6 divided by 100 is .06.

  • Multiply the sale price by the decimal.


If you are trading in a car at the dealership, you may be allowed to deduct the amount of the trade-in from the sale price in certain states. This means that you would only have to pay sales tax on the difference between the price of the new car you are getting and the car you are trading in. This is not the case if you sell your old car privately or do a trade-in at a different dealership. 

Do I have to pay interest on sales tax?

Sales tax is a separate fee from the sales price. When lenders decide how much credit they will extend to you they evaluate the LTV (loan to value ratio). The value is based on the sales price of the car excluding taxes and fees. LTVs typically hover around 90%, meaning that if the sales price of the car was $30,000 they would loan you around $27,000. You would need to pay at least $3,000 out of pocket as a down payment, plus any taxes and fees. It is possible to get a higher LTV if you have great credit, and you could then roll your interest and fees into your car loan. If you roll over your sales tax into your loan then you will be responsible for paying interest on it. It is more common however to make a down payment that comprises 10% of the car’s value, the sales tax, and the fees. This will also help your loan from becoming underwater, meaning you owe more on your car than the car is worth.



Who pays sales tax when buying a used car from a private party?

Buying from a private party can be beneficial for many reasons:

  • You can usually find a better price.

  • You don’t have to worry about upsells. 

  • It’s usually less of a time commitment.

  • You may have more bargaining power.

But buying a used car from a private party does not mean that you can avoid paying sales tax. It is still the responsibility of the buyer to pay sales tax in the state where the car is registered.

Can I avoid paying sales tax on a used car?

Unfortunately you cannot avoid paying sales tax unless you live in a state where there is no sales tax. Registering your car in a nearby state where there is no sales tax may seem like a way to avoid this, but your insurance and license need to match your registration. So in short, it’s not a good idea to attempt registering in another state. Sales tax is merely an unavoidable cost that you will need to account for when buying a car.

How can I get the best car loan?


Whether you are financing a new or used car, there are a few steps you can take to ensure that you get the best car loan deal possible. 

Research the car you want.

Be sure to look around at a few different dealerships and compare prices. Looking at Kelley Blue Book or Edmunds can also give you an idea of a fair sale price.


Prepare your finances.

You will get the best car loan possible by ensuring that your finances are in order. Request a copy of your credit report to review for any errors before applying.


Research lenders. 

You should apply with a few different lenders (we recommend 3-5) to give yourself the best chance to compare and get a good loan. You should get preapproved before ever setting foot in a dealership, as this will give you a leg up on negotiating and help ensure you don’t get talked into an unfair loan.


Negotiate at the dealership.

A good sale price will help you get the best car loan rate and deal possible. Try to negotiate on the sale price as well as on the extra fees that are tacked on. 

That’s everything you need to know about paying taxes on used cars.

Sales tax is unavoidable when it comes to purchasing a car, so be sure you factor it into your car buying decision and include it in your budget.

If you are overpaying on your car loan, contact Auto Approve today to see how much money you could save!


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