Car sales tax is an additional cost that can add hundreds or even thousands of dollars to the final price of a new or used car purchase. For buyers taking out a car loan already strained to their budget limit, this extra tax bill may seem impossible to cover. This leads many car shoppers to wonder – can you roll sales tax into a car loan? Or are there other options to help ease the burden of this large one-time tax payment?
In this comprehensive guide, we’ll explain everything you need to know about financing options for car sales tax, including:
Can Car Sales Tax Be Financed?
Unfortunately, in most states and for most lenders, you cannot add sales tax to the amount you finance on a car purchase. There are a few exceptions to this rule which we’ll cover below. But in general, sales tax cannot be included in a car loan and must be paid separately by the buyer.
Why Can’t Sales Tax Be Financed?
There are a few reasons why car sales tax is typically not able to be financed:
- Tax laws – In most states, tax codes prohibit financing or borrowing to pay sales/use tax. These laws are meant to protect consumers from predatory lending practices.
- Lender restrictions – Most auto lenders do not allow tax to be financed as part of the principal loan amount, which protects the lender from losses.
- Increased loan amount – Adding tax to the loan would increase the total amount financed, requiring higher monthly payments. Many buyers would no longer qualify or be over-extended.
So in essence, legal, lending, and consumer protection issues all come into play as reasons why sales tax is paid separately.
Read More: Paying Car Sales Tax: Everything You Need To Know
When Can You Finance Car Sales Tax?
While rare, there are some exceptions where sales tax financing is allowed:
1. Leasing
With a leased vehicle, sales tax is rolled into the total lease costs and therefore included in monthly payments over the term of the lease. So leasing does provide an option where you wouldn’t have to pay sales tax upfront.
2. Dealer Financing Incentives
Sometimes dealerships run special promotions where they offer to pay sales tax as an incentive if financing is done through them or with certain lenders. This effectively rolls the tax into the loan, but isn’t very common.
3. Third-party Lenders
A few specialized lenders like MyAutoLoan and RoadLoans allow tax and fees to be financed through them directly rather than the dealer. This third-party financing option is rare but can help buyers spread tax payments over time.
Read More: Ways of Buying a Car in Oregon to Avoid Sales Tax
Sales Tax Financing Alternatives
For buyers unable to qualify for the exceptions above, there are a few alternative options that can help ease the burden of paying a large lump-sum sales tax bill:
● Payment Plans Through the Dealer
Many dealers will work with customers by setting up a payment plan for sales tax and fees. This allows you to finance the vehicle through normal lending channels, then pay the dealer directly for tax and fees over a number of months using post-dated checks or automated debits.
● Personal Loans
Borrowers with good credit can take out a small personal loan from their bank or credit union for the amount of sales tax owed. This spreads payments over 12-24 months. Interest rates are usually lower than credit cards.
● Low-Interest Credit Cards
As a last resort, some buyers put sales tax on a low-interest credit card. This option will increase total costs with interest but gives flexibility in spreading payment over time.
Read More: Missouri Car Sales Tax Calculator: Exemption & Administration Guide
Frequently Asked Questions
Can I negotiate sales tax with a car dealer?
Unfortunately, dealers cannot reduce or negotiate state-mandated sales tax amounts since the funds go to government coffers. However, dealers can sometimes negotiate fees lumped into the “tax, title, and license” amount on purchase paperwork. These doc or dealer fees can potentially be reduced or removed in return for paying the advertised sale price.
If I trade in a car, is sales tax still charged?
Yes, in most states you will still owe sales tax even when trading in a vehicle. A few states do provide trade-in credits or sales tax exemptions but the majority will still require you to pay full sales tax on the pre-trade difference between MSRP and trade-in allowance.
Can I get a tax exemption if I use the car for business?
In some situations, yes – those using vehicles 100% for business purposes with proper documentation (business license, exemption certificate, etc.) may qualify for full or partial exemptions on sales tax. However, qualifications vary widely by state and intended business use of the vehicle.
How soon after purchase is sales tax due?
Payment of sales tax is usually required upfront before you can complete registration and drive the vehicle off the lot. Some dealers may offer payment plans on sales tax, but final payment is still typically required within 30 days of purchase.
Can car sales tax be deducted on my federal taxes?
No, sales tax on vehicle purchases does not qualify as an income tax deduction on your federal return. Some states do allow you to deduct car sales tax payments on state returns though, which can save you a little money.
Conclusion
Having to pay hundreds or even thousands of dollars in taxes and fees on top of your negotiated vehicle price can be an unwelcome shock for many car buyers. Unfortunately, in the vast majority of cases, state laws prohibit simply rolling sales tax into your auto loan.
Lenders also typically don’t allow sales tax to be financed as part of the principal amount borrowed, due in large part to the increased loan amount this would require. So the sales tax amount due generally needs to be paid upfront by car buyers before driving home their new vehicle.
There are some rare exceptions where dealership promotions, lease deals, or third-party lenders make it possible to finance sales tax. But for most regular auto purchases, the sales tax bill cannot be folded into the car loan.
Alternatives like payment plans and personal loans can help ease the burden by spreading tax payments over months instead of a lump sum. But ultimately there’s no way around paying sales tax in full eventually, even if doing so requires some financial creativity on the buyer’s part.
