When Do You Pay Taxes When Buying a Vehicle out of State?

sales tax when buying a car out of state

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If you purchase a vehicle out of state, you'll typically pay a sales or use tax when you register the car in your home state. If you've already paid the tax, though, your state Department of Motor Vehicles will most likely issue you a credit for the tax you've already paid.

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Buying a Car out of State and Tax Issues

A car is a big purchase. Buying a car in a state with a lower sales tax than your home state and potentially saving 5, 6 or 7 percent of the cost is an attractive idea.

Unfortunately, this doesn't work out well in practice. DMV.org explains that state DMVs are well aware of this potential loophole. To avoid losing revenue to out-of-state car sales, state DMVs require car owners to pay tax when they register the car if they purchased it out of state. So, as long as you register the car in your state of residence, you'll pay your state's sales tax on the purchase.

Sales Tax When Buying From a Private Party

Private parties aren't required to collect sales tax when selling a used car, so you won't pay tax immediately if you buy a car from a private party out

of state. Instead, you'll pay a sales or use tax when you register the vehicle in your home state.

If you did pay some sales tax in the state where you purchased the car, you'll probably be able to pay less tax to your state DMV. Many states offer car owners a tax credit for any tax they've already paid on a car. For example, say you buy a car in Wisconsin and pay 5.43 in sales tax. If you want to register it in Minnesota, you'll owe the difference between that and Minnesota's tax rate of 6.5 percent, which would be 1.07 percent, to the Minnesota DMV.

Sales Tax When Buying From a Dealer

Unlike ordinary individuals, auto dealers are typically required to collect any sales tax on cars that's required by the state. Edmunds.com notes that if you explain that the car will be registered in a different state, the dealer may be able to collect the tax on your behalf and remit it to your home state. If you do this, you won't have to pay the sales or use tax when you register your car.

Tip

Keep a copy of any sales tax payment receipts to verify to your home state DMV that tax has already been paid.

Source: ehow.com

Category: Taxes

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