How Does Auto Sales Tax Work?

You Purchase a New Car

After purchasing a new vehicle, whether it be from a dealer or a private party, you must go to the DMV in your area of residence to transfer the title to your name and register vehicle, to get tabs and license plates. Driving a car without registration is illegal, which forces people to go to the DMV even if they bought their car from a friend or family member.

Auto Sales Tax is Assessed at the DMV

Since all car buyers must go to the DMV, the state applies sales tax for the value of the car at the DMV before the buyer can register the vehicle. This means transactions of cars between private parties are not exempt from sales tax and cannot avoid it easily as they could in other types of transactions. This is beneficial to car dealerships that might otherwise suffer from potential buyers opting to buy from private parties to avoid tax.

Sales Tax is Determined by Your Place of Residence

When you are assessed sales tax on your new vehicle, the amount of the tax is equivalent to the normal sales tax rate in the city where the DMV is located. If you buy your car in a state with low sales tax, but register it in a city with a 7 percent tax rate, you must pay 7 percent of the value of the car in sales tax. This can also work in your favor. For example, if you live in a state with low, sales tax, you can buy a car out of state, bring it home, and pay no tax.