Buying Out Of State Cars – Do You Pay Sales Tax?

If you buy a car out of state, in most cases you will pay sales tax. Which state you will pay the sales tax to is the true question because, as we all know- death and taxes are two things we’re certain of. Although the laws vary from state to state, there are a few general guidelines to follow. However, before heading out to buy an out of state car under $5,000, you should contact both the DMV in the state where you are purchasing the car as well as in your home state so that you will know exactly what documentation you will need and which state you will pay sales tax to.

This sounds like a lot of trouble, so why would you even want to buy a car out of state? Your dream car under $5,000 could be sitting in a driveway just across the state line. Even if you don’t have your mind set on a particular car, by searching for cheap used cars in neighboring states, you are opening up many more options for shopping. Plus, you may find a great deal on a car that just happens to be in another state. Knowing ahead of time what to expect will make your out of state car buying experience simple rather than a nightmare.

Paying Sales Tax

  • In most states, if you buy an out of state car from a private party, you will not pay sales tax on the car in the state you’re buying it from. Sales tax gets paid when you go to the DMV to have the car registered in your home state.
  • If you buy a car from an out of state dealer, you will usually be given a sales tax exemption certificate that states that you, as the buyer, are the resident of another state. You will pay sales tax for your home state when you register your car.
  • If you buy a car in a state that has no sales tax, but you live in a state that does have sales tax, you will pay sales tax for your home state. This regulation is designed to prevent people from going to states with no sales tax to buy cars just to avoid paying taxes; your state will receive the sales tax.
  • Some states require that you pay sales tax to them when you purchase the car from a dealer, and you also have to pay sales tax to your home state when you register the car. This applies to cars purchased in a state with no reciprocity agreement with your home state. Most of the time, you can apply for a refund from the other state once you have documentation that you have paid the sales tax in your state.
  • Some states require that you pay sales tax to them when you purchase a car from a dealer, but they do have a reciprocity agreement with your home state. This means that you will pay sales tax to the state where you are buying the car, but you won’t have to pay sales tax to your home state, with one catch.  If the rate of sales tax you paid out of state was less than the rate of sales tax in your home state, then you may have to pay your home state the difference.

What Price is Used For Sales Tax Calculation?

  • If you purchase an out of state car from a dealer and have to pay tax in that state, then you will pay sales tax based on the price on your bill of sale. If you are paying the sales tax in your home state on a car purchased out of state from a dealer, then you will be paying your home state sales tax based on the price on your bill of sale from the dealer.
  • If you are paying sales tax for a car purchased out of state from a private party, you will be required to submit a sales receipt or something in writing stating the sales price and signed by the seller. Although you may be tempted to claim that you paid far less for the car than the actual sales price, this is not a good idea. The DMV is well aware of all of the tricks buyers use to try to get out of paying the amount of sales tax that is owed on cars. With the current financial status of most states, they are on the lookout for people who are trying to dodge taxes, and they could make getting your car registered a hassle if they think you are not being honest about the sales price. They may even contact the seller if they believe that you have falsified the information you are giving them.
  • In some states, if you claim a sales price that is much lower than what is deemed reasonable, you may have to complete a form stating the sales price, sign it and have the seller sign it,  and have it notarized, which will be a hassle and cost you more money.
  • Some states consider the sales slip irrelevant. They may use a pricing guide, such as KBB or NADA, and charge you sales tax according to the value of the car in the pricing guide. Other states go by the original list price of the car, and then use a table for depreciation percentages to determine the value of the car; they then charge you sales tax accordingly.
  • If you buy a car at an extremely low price because it is a salvage vehicle or has a blown motor for example, you may need to supply proof of the car’s original state and documentation of the restoration or repairs made to the vehicle once you have it road ready.

Other Tips

Before you leave to go purchase an out of state car under $5,000, make sure you know the laws regarding license plates in both states; you may be able to transfer the tags from your old car. However, you may have to get temporary transit tags from the selling state’s DMV. If so, be sure to purchase your car when the DMV is open so that you can legally drive it home. Also, notify your insurance company so that your new car will be insured before you drive it home. You may need proof of insurance if you need to get temporary transit tags. Be prepared and know all the facts before traveling out of state to buy a car.