The taxman will certainly get his share from your car purchase, but the amount you’ll owe depends on where you live.
To calculate how much this rate will amount to, look up the sales tax percentages for your state, county and city, then combine them for a total percentage. For example, car buyers who live in Chicago will pay 6.25% for state sales tax, 1.75% for county sales tax, 1.25% for city sales tax and a 1% special tax totaling 10.25% of the cost of the vehicle. So, some people will be paying steeper sales taxes than others based on location, but don’t think you can save money by searching cars in low-tax areas — sales tax is applied by where the vehicle will be registered, not where it’s bought.
Another consideration that affects sales tax is whether you’re trading in a car. Some states allow you to subtract your current car’s value from the price of the car you’re buying to arrive at the total taxable price, which would lessen the amount you owe in sales tax. Of course, this requires you to make the trade-in at the dealership where you’re buying your new car, but you should consider the entire transaction as negotiable and hold out for a fair trade-in value.
How to Pay Sales Tax for a Car Purchase
If you’re buying a car from a dealership, the salesperson usually completes this step with you along with the rest of the necessary paperwork before you drive off the lot. But if you’re buying a used car from a private seller, you’ll have to pay the sales tax when you make the trip to the Department of Motor Vehicles to transfer the title and register the car in your name. Consult your local DMV to find out the required forms that accompany this process.
Other Car-Buying Fees
There are a variety of additional fees attached to a vehicle purchase that may be applicable to you. Here are some common ones:
- Advertising fee: Manufacturers and/or dealerships use this to fund their marketing efforts, and it’s often included in the invoice.
- Documentation fee: This covers a dealership’s cost to process the sale’s paperwork.
- Trade-in fee: Dealerships might charge this to improve their potential profit on a trade-in, and it’s possible to dispute this to maximize your trade-in credit.
- Warranty fee: Dealerships might offer a service contract that goes beyond the basic warranty, but it’s not a requirement.
- DMV fees: You’ll have to pay title transfer and vehicle registration fees at the DMV if you bought your car from a private seller.
Be sure to find out which extra charges you’ll be responsible for at a given dealership before you sit down to fill out paperwork, or check the DMV costs in your state before completing a private sale.
Plan for Extra Fees
When planning your car-buying budget, it’s important to factor in sales tax and other "hidden” fees that will increase the total cost of the vehicle — you'd be surprised at how these secondary costs can add up, possibly enough to price a vehicle out of your range.
So, include sales tax the next time you use a car loan calculator to avoid any surprises from the greedy taxman. Then, manually add any additional dealership and manufacturer fees to the resulting price to see just how much more you’ll have to pay for a specific vehicle.