“The only difference between death and taxes is that death doesn’t get worse every time Congress meets.”
-Will Rogers
Taxes are a part of life that aren’t going anywhere, probably ever. So what are the different kinds of taxes you could face when buying or selling a vehicle? We’re going to dive deep into this one and show you the different kinds of taxes and a few examples of where you can expect to see them. Also, the state where you won’t have to deal with vehicle taxes at all! Let’s dive in.
Why Are Car Taxes So Complicated?
Every state has its own standards and runs its budget. States with high population densities spend a lot more on road maintenance, repair, and construction than low-density states, which cost a lot of money. Like it or not, your car taxes fund some of that.
But why do they have to be so complicated? Unfortunately, there isn’t a good answer to this. The federal tax code is thousands of pages long. Why? Because it’s written by a bunch of tax attorneys, I guess. We aren’t attorneys, so this isn’t our wheelhouse. We are car guys that want to save you some green.
Federal Versus State Taxes
The federal government does not deal in sales tax in the way that states do. Therefore, the most direct way you would probably deal with federal taxes on a car is during a sale if you made a profit. In this case, you are liable to pay capital gains tax for the amount you earned over the acquisition price.
Oddly enough, this has probably never happened for the average car owner in the history of forever until now. Capital gains are not uncommon for rare collectible cars and supercars because they are often bought as an asset intended to appreciate. There has never been a time before when average cars (especially used cars) are appreciating instead of rapidly depreciating.
The other interface where you might find federal tax involvement in cars on the personal-buyer level is tax credits for electric vehicles (EVs). To promote the widespread sale of EVs (if they were that great, wouldn’t they sell themselves?) the Fed offers a $7,500 tax credit for qualifying new cars and even used EVs bought from dealerships. Of course, all of that has to be factored in at tax time.
Duties & Tariffs
Duties are a tax levied by the federal government on imports from outside countries. Customs and Border Protection is the office responsible for the duty schedule and enforcing fees.
For automobiles, new or used, the fee is usually 2.5%, while trucks are an incredible 25%! No wonder there is no import market for trucks, and the ones made by ‘import’ manufacturers are all made in the U.S. Ouch.
Chapter 87 of the Harmonized Tariff Schedule lays out the tariff for all rolling stock, vehicles, and car parts. Again, it is a 2.5% fee for light cars and trucks, and this tariff schedule lays out every vehicle type imaginable in case you need some light reading.
State Taxes
Each state has standards for taxing autos, some high and others zero. But it is the state, along with the local government occasionally, who gets a piece of your hide when you buy a car and register it.
The federal government has already gotten its piece, especially for imports. Of course, this is not without adverse effects; when the price is increased by 2.5% for duties upon entry, the consumer eats it because the company has to raise the MSRP to cover the tariff. You’re welcome; you have already gotten taxed once in increased product cost, and now the state, county, and city want their pound of flesh.
Some states also impose their own unique taxes, which we cover later on.
Sales Tax
Sales taxes are a form of consumption tax, which is a tax on goods or services. Tariffs and duty fees are also examples of consumption taxes. A car gets hit with consumption taxes over and over again.
Sales taxes vary from location to location (even in the same state, they can vary widely) and are based on a percentage of the total cost of the purchase.
Of the fifty states, only five have no sales tax, one of which is Montana.
Forty-five states levy sales taxes and thirty-eight also allow local sales taxes to be collected. So, on top of your baseline state tax, the odds are high that you will also pay into the local coffers.
By the way, the top five states with high sales taxes(or bottom five, depending on how you look at it) are:
Tennessee (9.55%)
Louisiana (9.51%)
Arkansas (9.51%)
Washington (9.23%)
Alabama (9.22%)
Use Tax
Use tax is another type of sales tax. This one, though, is assessed on purchases made outside of the buyer’s residence but intended to be used, stored, or consumed in the buyer’s state of residence.
If the purchase would have been taxed had it been bought in the buyer’s home state, then the use tax is due.
Use tax rates are the same as the local sales tax and are just another name for the local sales tax, but applied on items bought out of state and brought back in.
In our circles, the obvious example is buying a vehicle out of state and bringing it back in-state if the buyer plans to use it in their home state. For example, you are on the state line and find a deal in the neighboring state. When you bring it back home to register it, you will still get hit with sales tax at the DMV; it will just be classified as use tax. That is unless you register it out-of-state. Recall that when you use our Montana LLC service, your residence for that vehicle is legally in Montana, which has no sales and no use taxes.
Excise Tax
Excise taxes are a lot different than the previous taxes. Unlike sales and use taxes, which are consumption taxes, the excise tax is legislated.
Excise taxes are required on specific goods and services. This type of tax is typically called a ‘sin tax’; it is the tax put on tobacco, alcohol, etc.
An excise tax is typically applied to fuel in the motor vehicle sphere. So, in this case, excise taxes are never applied directly to vehicles and vehicle sales but are an indirect tax levied by the federal government on our cars. It makes you wonder what the excise tax will be on EVs; is the Fed going to tax the sun and wind? Because we all know they aren’t going just to walk away from the gravy train that has been taxing gas.
The annual tax receipts in 2019 for fuel combined state and federal $71.48 billion for gasoline, and $27.64 billion for diesel, totaling $99 billion. There’s no way they will just let that easy money (isn’t all taxation easy money, though?), so this is something to think about if you are planning to jump on the EV train. All of the bonuses and kickbacks for buying one will not last forever, and the tax man will look for a replacement excise tax for diesel and gas.
Property Tax
Generally reserved for either business ventures or real estate, property tax is also occasionally tied to tangible personal property, which includes cars, trucks, and RVs. Tangible personal property is any physical property that can be relocated, unlike real property.
The type of tax levied on tangible personal property assets will most likely be ad valorem taxes, which are taxes based on the assessed value of the item. The Latin meaning of ad valorem is “according to value,’ which makes sense. Not all states charge annual property tax; the list is evenly split, with twenty-five states charging no property taxes on cars.
Some of the states that charge property tax on cars are pretty high! Virginia charges a whopping 4.05 percent annual property tax on cars! No, this is not in the place of the sales tax levied upon purchase; many of these states charge both.
Never go to the DMV again.
No sales tax.
No inspections.
Never go to the DMV again. No sales tax. No inspections.
Vehicle License Tax
The Arizona Vehicle License Tax (VLT) is a unique vehicle tax.
The Arizona VLT is another ad valorem tax that is mandatory for all drivers in the state. The raw deal with ad valorem taxes is that they have been going up in the past year since we have seen the excessive rise of used vehicle prices. So prices go up, and so do values on which the VLT is based.
The Arizona VLT is assessed in place of personal property taxes but does not include sales tax. Arizona has a base sales tax rate of 6.6 percent, but with local taxes, that number can reach a staggering 9.8 percent total sales tax rolled into the mix.
Title Ad Valorem Tax (TAVT)
In Georgia, a special tax is imposed on vehicle purchases, known as the Title Ad Valorem Tax (TAVT).
The TAVT was imposed on most vehicles purchased on March 1st, 2013, and later. The TAVT is a one-time tax set at a rate of 6.6 percent. In Georgia, TAVT replaces sales tax and annual ad valorem tax. TAVT is also paid every time the vehicle's ownership is transferred or when an individual becomes a new resident and registers in Georgia for the first time.
Vehicles that are not assessed the TAVT (trailer, non-registered vehicles) are still liable for an annual value-based tax you must pay upon registration.
Wrapping It All Up
Car taxes are complicated affairs. Every state is different, and each state has its own statutes and guidelines, and they are honestly impossible for the everyday man or woman to keep up with. Of course, we can’t keep up with them either - which is why we aren't tax attorneys or accountants - but we can help you save some cash on sales tax! Check out our vehicle registration options to see which one is the right pick for you!
John McCoy is a lifelong car and truck enthusiast and has a strong mechanical background off the road. He spent over 13 years in the U.S. Air Force as a crew chief, assigned to the B-1B Lancer, affectionately known as the Bone to those in the community, and the KC-135R Stratotanker. He resides on a small farm in Eastern Kansas where he (sometimes) enjoys fixing ancient farm equipment.