How to Legally Not Pay Sales Tax on Used Cars
The price of buying a new or used car has gone up, and won’t see any recovery for the most part. It’s a big purchase, which means the added sales tax is not incidental. In certain states, or for certain new cars, sales tax can run in the thousands of dollars. But for used cars, there are ways to eliminate or drastically cut sales tax costs.
Not all places have a sales tax of 9.5 percent like Los Angeles. That figure represents a 7.25 percent sales tax and a 2.25 percent city rate. So if you buy a used car there for $20,000, you’ll pay almost $2,000 in sales tax. But states like Michigan and Idaho, both cap sales tax at six percent. That would lower a $20,000 vehicle sales tax to $1,200.
Some circumstances eliminate sales tax on vehicles. Farm vehicles or those purchased by churches are tax-exempt. Some states allow a rebate of sorts if you turn in your previous car. But there is another way, though not without certain hiccups.
There are some states that don’t charge sales tax
Five states in the U.S. don’t charge sales tax. They are Alaska, New Hampshire, Oregon, Montana, and Delaware. Both Montana and Delaware also don’t charge sales tax on new cars as well. So residents in these states already enjoy sales tax-free car ownership.
Within certain areas, neighboring cities may have lower sales taxes. And especially if you live in Indiana, driving up to Michigan to buy a car means you won’t pay sales tax. But registering the car back in your own city or state, if the DMV sees no tax or lower tax paid, they could apply the proper sales tax for their jurisdiction. There’s no way around that.
The ways listed above are how some car buyers have gotten around the sales tax issue. But there are other ways that can be used that fall into a gray area but are legal. According to Yahoo Finance, some people set up limited-liability corporations (LLC) in states like Montana. Then the LLC buys and registers the vehicle.
There are different ways to lower sales tax
That may seem like a lot of hoops to jump through. It costs $1,000 to set one up in Montana. But the savings for something like a $200,000 motorhome can be substantial. The sales tax in LA for the motorhome would be almost $20,000.
But Montana is starting to close this loophole. Vehicle over $150,000 gets a flat sales tax rate of one percent. A general tax for vehicles registered to LLCs is also being looked at. And specifically in Los Angeles, the Highway Patrol has forms drivers can fill out to rat on out-of-state tax dodgers.
Rather than trying to avoid sales taxes altogether, there are ways to trim down the cost of used vehicles. First, look for vehicles that have been listed for a while. After a few weeks or months, sellers get motivated to take what they can get.
Private sellers vs. dealers
Private sellers are another way to get a lower price. Dealerships have overhead and in most cases cover certain repairs under a warranty. All of this factors into the price. Since private sellers have none of these costs, they tend to sell their vehicles lower.
And don’t forget, cash is king. Coming with cash, though posing its own risks, in many cases makes the sale more painless for the seller. And there is no car loan to make payments on. Maybe have the two of you go to your bank for the cash from your account to keep the transaction in a public place.
If you’re considering an LLC or other ways mentioned, you should consider talking to your lawyer or a financial planner for some advice. This way you can look at your options and possible repercussions should your state decide you need to pay up.