How Much Are Taxes on Cars?
Demystify vehicle taxation. Explore how various taxes apply to car purchases and ownership, with costs differing by location and over time.
Vehicle ownership in the United States involves various taxes that differ significantly by location. These financial obligations are not uniform across the country, with rates and rules often differing at state, county, and even city levels. Both the initial purchase and ongoing ownership involve distinct tax considerations that prospective and current car owners should understand.
Taxes on Vehicle Purchases
The primary tax encountered when purchasing a vehicle is sales tax, which is typically applied to both new and used cars. This tax is generally calculated as a percentage of the vehicle’s purchase price. Sales tax rates can vary widely, from states with no sales tax on vehicles to those where combined state and local rates can exceed 9%. Forty-five states and the District of Columbia impose general sales taxes, and local governments in many of these states may levy additional sales taxes.
The method of calculating sales tax can also be influenced by a trade-in. In many states, the value of a trade-in vehicle is subtracted from the purchase price of the new car before sales tax is applied, which can result in tax savings. For example, if a car is purchased for $45,000 and a trade-in is valued at $25,000, sales tax may only be calculated on the $20,000 difference. A few states, however, calculate sales tax on the entire vehicle purchase price, regardless of any trade-in. If a vehicle is purchased out of state, the sales tax rate of the state where the car will be registered applies, not the state of purchase.
Sales tax exemptions may apply to vehicle purchases, varying by jurisdiction. Some states offer exemptions for specific vehicle types, such as electric or plug-in hybrid cars, often with price caps. These exemptions might be partial, reducing the taxable amount, or provide a full exemption for qualifying vehicles. Additionally, gifted vehicles might be exempt from sales tax or subject to a small gift tax, depending on state rules.
A “luxury tax” may also apply to very high-priced vehicles, although this is not broadly enforced at the federal level for cars. Some states may levy their own luxury taxes on expensive vehicles, with thresholds typically starting around $50,000 or $60,000, and the tax applied to the amount exceeding this threshold. While not a tax, other charges like documentation fees can add to the overall cost of a vehicle purchase.
Ongoing Vehicle Ownership Taxes and Fees
Beyond the initial purchase, vehicle owners incur recurring taxes and fees. All states require annual vehicle registration, which involves a fee. These fees are calculated differently across jurisdictions, often based on factors like the vehicle’s type, weight, age, or assessed value. Some states use a flat fee, while others base the cost on a percentage of the vehicle’s value or its weight.
A significant ongoing cost in some jurisdictions is the personal property tax, also known as an ad valorem tax, on vehicles. This tax is levied by some states and local jurisdictions on the assessed value of the vehicle. The assessed value is typically determined using guides like the National Automobile Dealers Association (NADA) guide or Kelley Blue Book, which factor in the vehicle’s age, condition, and depreciation. Not all states impose a personal property tax on vehicles; where it exists, the tax rate is applied to the assessed value, and it can vary by county or municipality.
Other annual fees may also apply depending on the location and vehicle type. These can include emissions testing fees, particularly in areas with air quality regulations. These tests typically incur a fee upon inspection or as part of the registration process. Various local surcharges might also be added to annual registration or property tax bills. These recurring costs are generally due annually, often coinciding with the vehicle’s registration renewal.