Do You Pay Sales Taxes on a New Car Minus the Trade In?

Dealers charge tag and title fees in addition to sales tax.

Dealers charge tag and title fees in addition to sales tax.

When you buy a new car and trade in your old car, the amount of sales tax you pay depends on state and local sales tax rates and whether the taxable purchase price is figured before or after you subtract your trade-in allowance. Five states have no sales tax; six states and the District of Columbia tax consumers on the full purchase price of the car; and the remaining states only tax new car buyers on the price of the new car minus their trade-in allowances. Sales tax, however, is only one component of the total taxes and fees you'll pay to drive a car.

State Sales Tax

Regardless of whether you trade in a vehicle, you won't pay any sales tax when you buy a new car in Alaska, Delaware, Montana, New Hampshire or Oregon. In any other state, you'll pay an average of 5.75 percent in state sales tax plus additional county or city sales taxes. For example, the state sales tax in Georgia is only 4 percent, but each county or city adds an additional 2 percent to 4 percent, bringing the top sales tax rate to 8 percent.

Trade-In Allowance

In most states, when you trade in a car and purchase a new vehicle at the same time, you're only taxed on the sales price of the car minus the value of your trade-in. However, if you live in California, Hawaii, Kentucky, Maryland, Montana or Washington, D.C., you'll pay sales tax on the full price of the new vehicle, regardless of your trade-in allowance. Michigan changed its law in 2013 to exempt the first $2,000 of a trade-in from sales tax. The exemption will grow by $500 per year until it reaches $14,000.

Rebates and Dealer Incentives

Some car manufacturers provide rebates and some dealers offer cash incentives to customers who buy a new car. If you're entitled to a manufacturer's rebate, a majority of the states tax you on the purchase price before the rebate. Dealer incentives are not typically included in a new car's taxable sales price except when the dealer is reimbursed for the incentive. For example, if the dealer gives you a $500 rebate for charging your purchase on a particular credit card, and the credit card company reimburses the dealer for the $500 discount, that rebate cannot be deducted from the taxable sales price of the car.

Total Taxes and Fees

The amount of sales tax you pay when purchasing a new vehicle is only one component of the total fees and taxes that state and local governments charge to own a car. For example, while New Hampshire has no state sales tax, the fees you pay to your local town are likely even higher than the taxes assessed by most other states. Nevada charges a state sales tax of 6.5 percent, a government services tax of 1.4 percent, and a gas-guzzler tax on cars that get less than 22.5 miles per gallon.

About the Author

Steve McDonnell's experience running businesses and launching companies complements his technical expertise in information, technology and human resources. He earned a degree in computer science from Dartmouth College, served on the WorldatWork editorial board, blogged for the Spotfire Business Intelligence blog and has published books and book chapters for International Human Resource Information Management and Westlaw.

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