Last Updated on December 19, 2020 by Joe Regan
Howdy, Driver? You should know the ways to avoid sales tax on a car legally today.
You have to pay sales tax when you buy a car if your state collects sales tax. When you go to register a car (with or without title), your local DMV charges for sales tax.
Your state determines sales tax by multiplying the cost of your vehicle by the rate of the sales tax. For instance, if the taxable cost of your car is $25,000 and the tax rate is 7.2%, your sales tax is $1,800.
You can avoid sales tax by registering your car in a sales-tax-free state, however, if your state collects sales tax, you must pay when you move the car to your home state for registration.
At least five states including, Alaska, Delaware, Montana, New Hampshire, and Oregon do not have sales taxes.
But can you avoid paying sales tax for a car? Let’s find out!
How to Avoid Paying Sales Tax on a Used Car
It is illegal not to pay sales tax, regardless, you can bypass paying sales tax for a used or new car legally.
Note that it does not work always, but I am confident it will work for you.
Below are the ways to avoid paying sales tax on a car:
- Use the Sales Tax Exemption
- Add the Vehicle in Your Tax Filing
- Register Before You Move the Car
- Buy from a Sales-Tax Free State
Use a Sales Tax Exemption Criteria
Some circumstances attract free sales tax on a car – used or new, to individuals. For example, if you are a veteran, disabled, or you belong in a specified class of individuals that your state waives sales tax for, you will not pay sales tax on your car.
Moreover, older cars do not attract sales tax charges. So, if you buy a typical classic vehicle manufactured before 1973, for instance, you will not pay sales tax on the vehicle.
And if your vehicle is for productive purposes such as horticulture, forestry, and agriculture, you are exempted from paying sales tax.
However, you must have the free disc on display in your car always.
Add Vehicle in Your Tax Filing
You may add a vehicle in your tax filing to avoid paying sales tax on the vehicle.
If you purchase a hybrid vehicle, or low emission or no emission vehicle, for instance, tax credits could be available for you. However, the credit may or may not cover the sales tax on your vehicle, which depends on the cost value of the car.
The internal Revenue Service (IRS) permits you to deduct the sales tax you paid on a vehicle, but you must itemize on Schedule A on Form 1040. Otherwise, you do not qualify to deduct sales tax.
You are allowed to deduct sales tax for both new and a used car regardless of whether you purchase the car from a private seller or the dealership.
Register Before You Move the Car
If you live in a state that does not charge sales tax but would be moving to a state that charges sales tax, buy and register the car in your state at least 3 months to departure. Note that the number of months differs by state.
When you arrive in a state like Alaska that charges sales tax on a car, you do not have to pay sales tax to register your car.
Buy from a Sales-Tax Free State
Regarding how to avoid sales tax on a vehicle, you could purchase the car from any of the sales-tax-free states.
States that do not charge sales tax on a car are Alaska, Delaware, Montana, New Hampshire, and Oregon.
However, if your home state charges sales tax, you must pay for sales tax when you want to register the car. Nevertheless, you can drive the car in your home state (that charges sales tax) under the name of a business located in the states that do not charge sales tax.
In the sections below, I discuss how you can avoid sales tax when you buy a car out of state.
How to Avoid Sales Tax When Buying a Car Out of State
Traditionally, if buy a car out of state, you must pay sales tax on the car when you return to your home state.
Like I mentioned earlier, some of the states that do not charge sales tax on a car are Alaska, Delaware, Montana, New Hampshire, and Oregon. For example, if you buy a car in Montana, when you move the car to California, you must pay the sales tax when registering the car.
Nonetheless, you can exempt paying the sales tax legally, especially if the tax rate for your vehicle is expensive.
Below are steps to avoid sales tax when buying a car out of state:
Own a Business in a Sales-Tax Free State
You can own a business in any of the states that do not charge sales tax on a car. For example, if you reside in Minnesota (charges sales tax on a car), you can own a business in Montana (free sales tax).
Your company in Montana would buy and register a car in your name and the name of the business. Your car is now a business car and you can drive it in states that charge sales tax legally.
Submit Your Paperwork
To establish a company in Montana, you could contact a certified attorney or an agent in Montana. The agent, of course, would handle the registration of your car in your name and mail the license plates and vehicle registration to you.
The Problem of Registering a Car Out of State and Possible Solution
To get away from sales tax on a car by registering in a sales-tax-free state, you would face a possible problem. However, you can bypass the problem permanently.
Of course, you must have your new car insured. Now, when you want to insure the car in your home state (that charges sales tax), you will give the insurance company information of the agency that registered your car in Montana (a free sales tax state).
If you give the insurance company personal information that is not associated with the vehicle, you risk not getting your insurance claim approved.
The reason is that your vehicle is owned in Montana while it is driven in Minnesota and the insurance premiums will increase.
Before you register a car out of state to avoid sales tax, be sure that the value of sales tax is higher than the renewal cost and the money you save from evading sales tax. Otherwise, the insurance premiums will be too high.
If you drive a car registered in Oregon, for instance, in California, the police will question you about the license plates. Of course, they would demand to know why your car is registered in Oregon, while you reside in California.
Explain to the police that the car is a business car registered under the name of a company in Oregon.
Do I Have to Pay Sales Tax on a Car When I Move?
Traditionally, you are supposed to pay sales tax on a car when you move from a sales-tax-free state to a state that charges sales tax. However, you may be exempted from paying sales tax on a car if you purchase and register the car in a sales-tax-free state 90 days to your departure.
When you arrive in the state that charges sales tax, you may not have to pay when you register the car.
Is Sales Tax on a Car Based on Where You Live or Where You Buy the Car?
Sales tax on a car depends on where you buy the car and not where you live and it is applied when you buy, transfer ownership, or lease a car. If you buy a car from a state that does not charge sales tax, you may register the car in your home state that charges sales tax without paying sales tax.
Moreover, apart from sales tax on a car, you may pay personal property tax on a car. Personal property tax does not depend on where you buy the car but where you live and you will make the payment annually during the renewal of vehicle registration.
Unlike vehicle sales tax, the cost value of personal property tax decreases as the sales value of your car decreases.
I understand the temptation to evade sales tax on a vehicle you just purchased. For the sake of avoiding legal actions that affect your finances, pay the vehicle sales tax.
Note that the methods I highlight in this article work if you know what you are doing. You may research the laws of your state regarding sales tax on a vehicle for more information.
Do not use a dummy address in an attempt to avoid paying sales tax on a vehicle; other than the vehicle sales tax, you will be fined for evading tax. In California, for example, failure to pay sales tax attracts a fine in the region of $1,000 and $5,000 and a jail term up to 1 year.
Meanwhile, find out whether you can drive a car home without license plates in your state.