Buying a new car is an exciting experience, but the sales tax bill can put a damper on your new purchase. Depending on where you live, sales tax on a $30,000 car can add $1,500 or more to the final price. Fortunately, there are legal ways to avoid paying sales tax when buying a car in most states. This comprehensive guide will explain multiple strategies to legally buy a car without paying sales tax, potentially saving you thousands.
Should I Buy a Car Without Paying Sales Tax?
One of the most common ways people attempt to avoid sales tax on a car purchase is by buying out-of-state. The advantage is you only pay sales tax in the state where you buy the car. If you live in a high tax state like California and buy in Oregon which has no sales tax, you can save $1,500 or more. However, there are downsides to consider:
- You may still owe “use tax” when registering in your home state. Some states have agreements to collect tax for each other.
- Any warranty or recall work would require traveling back to the seller’s state.
- Personalized plates and some vehicle perks may not transfer out-of-state.
Overall, buying out-of-state can save on sales tax but requires research on state tax reciprocity agreements. It also may be inconvenient if repairs are needed.
Read More: Ways of Buying a Car in Oregon to Avoid Sales Tax
Can I Buy a Car Online to Avoid Sales Tax?
With the rise of online car retailers like Carvana, buying a car over the internet seems like an easy way to avoid the dealership and sales tax. However, when you register the car locally, you will still get a sales tax bill. Licensed dealers are required to charge sales tax based on your home address regardless of where the car is purchased.
Online buying can offer convenience but won’t help you legally skip sales tax. Some states also have laws requiring local dealerships to have a period to match online pricing. To avoid sales tax, you need other strategies.
What Are the Most Effective Strategies to Avoid Paying Car Sales Tax Legally?
While buying across state lines or online won’t help avoid sales tax, there are proven legal methods to skip paying tax when registering a car locally:
1. Purchase Through a Private Party Seller
Buying a used car through a private party sale instead of a dealership offers a tax advantage in most states. Private sellers are not required to collect sales tax on vehicle transactions. You will just pay any required registration fees when titling the car locally.
This approach works best when buying a used car that is several years old. Finding a private seller can take more effort but yields the best tax savings. Just be diligent getting a vehicle history report and inspection to avoid issues.
Read More: Do You Have to Pay Sales Tax When Transferring a Car Title?
2. Receive a Car as a Gift
If you have generous family or friends willing to buy you a new car, receiving it as a gift transfers ownership without sales tax. Gifting circumvents tax because there is no monetary sale taking place.
The person gifting you the car would pay the tax upfront in most cases and sign the title over to you as a $0 sale. You will just need to pay registration fees which are much less than sales tax.
3. Buy a Car Through a Trust
Setting up a legal trust and purchasing a car through it is a proven way to get around sales tax in some states. The car gets titles and registered under the trust’s name, not yours personally. Since trusts are exempt from sales tax in many states, you can buy a car tax free this way.
An estate planning attorney can help you establish a legal trust for this purpose if allowed in your state. This strategy involves legal complexity but can legitimately save on tax for high-end purchases.
Read More: How Does Sales Tax Work When Buying a Car Out of State?
What States Have the Highest and Lowest Car Sales Tax Rates?
Car sales tax rates vary widely across different states, ranging from 0% to as high as 10%:
Highest Car Sales Tax Rates
- California – 10.25% average combined state and local rate
- Arizona – 9.18% in Phoenix
- Washington – 9.23% in Seattle
- Connecticut – 6.35% base + local taxes
Lowest Car Sales Tax Rates
- Oregon – 0% sales tax statewide
- Delaware – 0% sales tax
- New Hampshire – 0% sales tax
- Montana – 0% sales tax
Alaska, Hawaii, and South Dakota follow with low rates under 5%. When buying a $30,000 car, sales tax differences between high and low rate states can be $3,000 or more.
Read More: Can Car Sales Tax Be Financed? A Detailed Guide
Average Sales Tax Rate by State
| State | Combined Rate | Tax on $30,000 Vehicle |
|---|---|---|
| California | 10.25% | $3,075 |
| Arizona | 9.18% | $2,754 |
| Washington | 9.23% | $2,769 |
| Alabama | 9.22% | $2,766 |
| Tennessee | 9.55% | $2,865 |
| Kansas | 9.15% | $2,745 |
| Oklahoma | 9.42% | $2,826 |
| Minnesota | 8.88% | $2,664 |
| Illinois | 8.82% | $2,646 |
| Arkansas | 9.53% | $2,859 |
| Nebraska | 8.27% | $2,481 |
| Georgia | 8.00% | $2,400 |
| Texas | 8.25% | $2,475 |
| Florida | 6.50% | $1,950 |
| Colorado | 7.75% | $2,325 |
| South Carolina | 7.46% | $2,238 |
| North Carolina | 6.75% | $2,025 |
| Pennsylvania | 6.60% | $1,980 |
| Ohio | 7.42% | $2,226 |
| Michigan | 6.00% | $1,800 |
| Nevada | 7.90% | $2,370 |
| Iowa | 6.94% | $2,082 |
| West Virginia | 6.50% | $1,950 |
| Wisconsin | 5.84% | $1,752 |
| Virginia | 5.75% | $1,725 |
| Maryland | 6.00% | $1,800 |
| Indiana | 7.00% | $2,100 |
| Missouri | 7.50% | $2,250 |
| New Jersey | 6.63% | $1,989 |
| Utah | 7.08% | $2,124 |
| Kentucky | 6.00% | $1,800 |
| New Mexico | 5.13% | $1,539 |
| Idaho | 6.00% | $1,800 |
| Vermont | 6.00% | $1,800 |
| North Dakota | 5.00% | $1,500 |
| Wyoming | 4.00% | $1,200 |
| Louisiana | 10.45% | $3,135 |
| Rhode Island | 6.00% | $1,800 |
| Mississippi | 7.00% | $2,100 |
| Hawaii | 4.00% | $1,200 |
| New York | 8.52% | $2,556 |
| Maine | 5.50% | $1,650 |
| South Dakota | 4.50% | $1,350 |
| Alaska | 3.75% | $1,125 |
| Delaware | 0.00% | $0 |
| Montana | 0.00% | $0 |
| New Hampshire | 0.00% | $0 |
| Oregon | 0.00% | $0 |
Should I Consider Leasing to Avoid Sales Tax?
Many people consider leasing instead of financing to buy a car and save on sales tax. With a lease, you only pay sales tax on each monthly payment instead of the full purchase price. This can yield thousands in savings compared to financing the same car.
However, leased vehicles typically have mileage limits and you don’t build any equity. You also still owe lease-end fees when turning in the car. Leasing makes sense for the tax advantages and lower payments if you drive fewer miles and want a new car frequently.
Read More: Missouri Car Sales Tax Calculator: Exemption & Administration Guide
What Are the Best Cars for Avoiding Sales Tax?
If you do pay sales tax when buying, the tax rate is the same regardless of the car you choose. However, opting for an affordable or used car where the tax is a smaller portion of the overall price will keep your total bill lower:
- Used Cars Under $10,000 – Sales tax on a used economy car may only be a few hundred dollars versus thousands on a new luxury vehicle.
- Electric Vehicles – Some states offer sales tax exemptions on electric vehicles to encourage adoption. This can yield thousands in savings.
- Fuel Efficient Models – Choosing a car with high mpg will offset sales tax expense through lower long-term fuel costs.
- Cars with High Resale Value – Options like trucks and SUVs hold value well, allowing you to recoup more of the after-tax price when selling.
Read More: Do You Have to Pay Sales Tax When Transferring a Car Title?
What Documents Do I Need to Register a Car Without Paying Tax?
When titling and registering a car without paying sales tax through one of the legal methods above, having proper documentation is key:
- Bill of Sale – For private party and gift transactions, a bill of sale with $0 or gift value is required. Both parties must sign.
- Trust Documents – If registering a car to a trust, you’ll need the trust agreement and tax ID number. An attorney can provide the necessary paperwork.
- Proof of Residency – To transfer an out-of-state registration, you may need two documents confirming you now live in the new state, like utility bills.
- DMV Forms – Your local DMV will provide specific forms for registering vehicles, transferring ownership, and exempting sales tax that must be completed.
Read More: Paying Car Sales Tax: Everything You Need To Know
Conclusion
Buying a car is a major purchase and the sales tax significantly increases the final price. Depending on where you live and the vehicle price, sales tax can equate to $1,000’s extra. Luckily, there are proven legal methods to avoid paying automotive sales tax through strategic approaches like private party buying, receiving a gifted car, or purchasing through a trust. Leasing also reduces sales tax owed.
While taxes are unavoidable, taking the right steps when buying a car can help you steer clear of costly sales tax and keep more money in your pocket. Considering your options ahead of time is key to finding the best strategy.
Frequently Asked Questions
1. Can I buy a car in another state and avoid sales tax?
Not usually. Most states have use tax laws requiring you to pay the equivalent sales tax rate when registering an out-of-state vehicle locally. Some states have reciprocity agreements to collect tax for each other. Buying across state lines generally will not help you legally avoid tax.
2. How much can I save buying a car with no sales tax?
Savings depend on the combined sales tax rate in your area and the vehicle purchase price. With tax rates around 10% in some areas, you could save $3,000 or more on a $30,000 car. Higher priced vehicles yield even greater savings from avoiding sales tax.
3. Is leasing better for avoiding sales tax?
Yes, with a lease you only pay monthly sales tax on each payment, not the full car value. This can yield thousands in tax savings over financing the same car. The downside is leases have mileage limits and you don’t build equity.
4. Can I avoid sales tax on a used car purchase?
Yes, buying from a private party seller instead of a dealership allows you to avoid paying sales tax in most states. You still pay registration fees but save significantly compared to purchasing a used car from a tax-charging dealership.
5. How can I transfer a car gift without paying tax?
When properly gifted, a car can be transferred without sales tax. The giver pays any tax upfront on purchase in most cases. With a $0 or gift bill of sale, you can register the car in your name and only owe registration fees, skipping sales tax.
