What Is Car Tax Used For?

If you are likely to buy a vehicle in the near future, whether it’s a new or a used one, you will have to pay state sales tax. But, what is car tax used for, and does every state have this type of tax?

State sale tax on your vehicle is something you will have to pay in nearly all states in the US. However, if you want to figure out where each penny goes, you should look into local sales tax rates. Depending on the area, tax payments may be used for construction costs or to fund the maintenance of the roads.

A pile of tax documents on a desk

Since some counties and cities impose taxes on purchases, the maximum sales tax may reach more than 10% of the purchase. So, let’s assess everything I know about this type of tax.

What Is Car Tax Used For?

Having a car to move around is a must nowadays. We use them to commute or simply drive around on our daily errands. However, buying a new vehicle, a used one, or leasing may come with tax. Depending on the state, county, or even municipality, your car tax may come as a sales, excise, or even personal property tax.

The amount you pay is usually determined by the car’s value, and understanding all the rules that apply is essential. Also, understanding how many costs you will have to pay regarding your vehicle can help you plan ahead and decide whether a car is affordable or not.

The Types of Taxes Explained

As I have already stated, the type of tax imposed for buying a vehicle varies depending on the state, county, and the municipality you are registering the car in. However, there may be cases where you are obliged to pay both the state and the local Government.

Explanation of the Sales Tax

When you take your savings to buy yourself a brand new or a used vehicle, you are very likely to pay a sales tax. It is usually due when ownership of the car changes hands, and it includes purchases between private individuals or from a dealership. However, the only exemption to this rule in some states may be when ownership passes between members of a family or with cars that are gifted to someone else. Also, keep in mind that if you have decided to buy an electric car, you will have an additional fee of $64 to pay.

Some States Tax Cars as Property

While some states tax cars only through the sales tax, others don’t have such a levy. However, there are certain states that oblige car owners to pay property taxes for their vehicles. The table below shows which states impose this type of tax on cars, the rates, and an annual bill on an example car worth $25,000.

StateRateAnnual bill for a vehicle worth $25,000
Rhode Island3.46%$864

States That Don’t Have a Sale Tax for a Car

While the majority of states will tax an owner for a car on purchase, the following US states don’t have a sales tax for vehicles:

  • Alaska,
  • Delaware,
  • Montana,
  • New Hampshire,
  • Oregon.

Will You Pay Taxes Where You Live or Where You’ve Made the Purchase?

Paying car taxes in one way or another may be confusing for people that wish to make an out-of-state purchase. If you’ve landed a sweet deal across the country, you may still be obliged to pay a fee. And the rule that applies is straightforward, as you will be paying your taxes in the state where you are registering your vehicle.

For example, if your home is located in Georgia and you are about to register your car there, it’s where you will pay the sales tax. The exemption is when you buy a new or used car from a dealership because the taxes are included in the price, so that means you are paying the tax in the state where you are buying.

How Can You Calculate the Tax You Are Obliged to Pay?

Depending on the type of tax you are paying, you should do a little math and calculate just how much you are expected to pay. It’s easier when buying a car from a dealer, as they will add the tax into the asking price. But if you are expected to pay a sales tax, the calculation is simple. You should find out what the tax rate in your state is (or county or municipality) and multiply it by the price of the vehicle. Then, you should divide the number by 100, and you will get the exact amount you should pay.

A woman writing on a pile of papers

Sellers Have Their Own Sets of Taxes to Pay

As a seller, the taxes you may or may not have to pay will solely be dependent on the asking price for the vehicle. When you decide to sell a pre-owned car for a much lower price than what it was bought for, it is considered a capital loss by the IRS and thus won’t be taxed. However, if your asking price is much higher than what you bought it for, it is considered a profit or capital gain, and the IRS will look it up.

As a buyer of a pre-owned car, besides the sales tax, you will have some more expenses to pay. This includes the amount for the title of a used car, the licensing and registration, as well as insurance fees.

Why Do We Pay Taxes on Vehicles?

In the end, to answer the question about what car taxes are used for – each state, county, and the municipality will determine where it directs these funds. They may be used to finance road maintenance or construction expenses.

But most importantly, to understand the true cost of owning a vehicle, it’s important to know both state laws regarding taxes and local rules, too. It will help you determine the total amount of the tax you will owe. And a good place to start informing yourself is the Department of Revenue for the state you live in or your state’s DMV.