Sales tax on large purchases, like a car, is crucial to factor in price. Depending on where you live and the price of your car, sales tax can cost you thousands of dollars. But did you know that there are legal ways to not pay sales tax in a used car? Let’s review how sales tax affects your purchase and how to avoid paying sales tax on a used car.
If you are thinking of buying a car, a Financial Advisor can help you create a financial plan to meet your savings goals.
How much is the sales tax on a used car?
Before we talk about how to avoid sales tax on a used car, let’s put sales tax into perspective. For example, let’s say you buy a used car from a dealer in Los Angeles. The used car sales tax is the state tax rate (7.25%) plus the city rate (2.25%), for a total of 9.5%. If you spend $20,000 on a used car, you are paying $1,900 in sales tax.
However, if you buy a car in Michigan or Idaho, both have a flat state rate of 6%. $20,000 on a car there results in a sales tax of $1,200.
How to Avoid Paying Sales Tax on a Legally Used Car
There are a few ways to avoid car sales tax. You may qualify for an exemption if it is a farm vehicle or used for a church. You may also be able to get a tax refund for trading in your old car.
But there is a way to legally avoid paying sales tax on a used car, with no exemption or refund. That’s to buy it somewhere that doesn’t charge sales tax and register it there. Five states do not charge sales tax in used cars:
If you live in one of these states, you can easily avoid any legal gray areas by simply buying the car.
Why buying a car in another state doesn’t work
You may think you can avoid sales tax by simply buying a car in a state that doesn’t charge sales tax, but it doesn’t work that way. Let’s say you live in Vermont (6% sales tax) and drive to New Hampshire (0% sales tax) to buy a car. When you buy the car, you won’t pay sales tax.
However, when you return to Vermont and register your vehicle, your local DMV may notice that you did not pay the tax and may charge you at that time. This can also happen if you buy the car from the owner with cash, or if you buy in a city with a lower rate than where you live. It all depends on how your locality raises revenue.
The Montana LLC Loophole
Now that we’ve covered how to legally avoid sales tax on a used car, let’s talk about a gray area. Especially when buying an expensive car or RV, you can save a lot of money by avoiding sales tax. One way people have tried this is to set up a limited liability company (LLC) in the only state that does not charge vehicle sales tax to resident LLCs: Montana. The vehicle is then purchased and registered with the LLC.
While this sounds like a pain, think about the savings. It is relatively simple and inexpensive to set up an LLC (usually around $1,000). If you’re buying a $300,000 RV and you live in Los Angeles, with a 9.5% sales tax, that’s an extra $28,500.
However, the states are aware of this. tax loophole and you can still look up your payment. If they find out that you primarily drive the vehicle in a state where it is not registered, you can get into legal trouble. In fact, the California Highway Patrol has a form for citizens to report vehicles they suspect are being driven by people trying to evade taxes.
The problem with this loophole is that what is legal in one state is not necessarily legal in another. It is legal to set up a Montana LLC to buy a car in Montana, but what you do with that car in your state depends on your state. If you need legal advice, talk to a lawyer.
Other ways to save on a used car
Avoiding sales tax on a used car may be unlikely for you. You can still save some money in other ways. Here are three:
Negotiate a better price: Used cars have much more flexible prices than new cars. You can look for cars that have been on the list for a long time and where sellers are more likely to be flexible.
Avoid dealerships: If you’re looking to save some money, you might have better luck with a private seller. dealers can make you spend more with add-ons, while private sellers may be looking to get a decent price for their cars.
Come with cash: Cash will give you more bargaining power because it is immediate. There is no financing involved. And because you avoid a car loan, you won’t pay interest.
Bottom line
The easiest way to avoid paying sales tax on a used car is to live somewhere that doesn’t collect it. You can try shopping in another state or city, but your state will likely come to collect. Instead, it’s better to find other ways to lower used car costs.
Tax Planning Tips
If you’re navigating the intricacies of taxes, it helps to have a professional on your side. Finding a financial advisor doesn’t have to be difficult. Free SmartAsset Tool connects you with up to three financial advisors serving your area, and you can interview their compatible advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, start now.
Budgeting can be extremely helpful in improving your finances and helping you save for big purchases like a car. SmartAsset Budget Calculator can help you create a budget to reach your financial goals.
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The charge How to Legally Avoid Paying Sales Tax on a Used Car first appeared in Smart Asset Blog.
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