Which States Charge the Least, Most in Car Taxes?

January 10, 2022

Which States Charge the Least, Most in Car Taxes?

You have to make a number of decisions when buying a car, including what body style best suits your lifestyle, where to buy the vehicle from, and of course, how much to spend. Many people focus solely on the purchase price when determining whether or not they can afford a vehicle. However, the purchase price is not the only cost you should consider. 

Most states charge sales tax on vehicles, which can increase the cost of buying a car by thousands of dollars. Each state sets its own sales tax rate, so the amount you will need to pay will vary depending on where you live. If you’re preparing to buy a vehicle, it’s important to understand which states have the least and most in car taxes so you know what to expect. 

Which States Have the Highest and Lowest Vehicle Sales Tax Rates?

State sales tax rates can vary from year-to-year. Currently, the states with the highest sales tax rates include:

  1. Nevada: 8.25%
  2. Kansas: 7.50%
  3. California: 7.25%
  4. Indiana: 7%
  5. Rhode Island: 7%
  6. Tennessee: 7%
  7. Utah: 6.85%
  8. New Jersey 6.63%
  9. Georgia: 6.60%
  10. Arkansas: 6.50%

The states with the lowest sales tax rates include:

  1. Alabama: 2%
  2. Colorado: 2.90%
  3. North Carolina: 3%
  4. Oklahoma: 3.25%
  5. Hawaii: 4%
  6. Louisiana: 4%
  7. New Mexico: 4%
  8. New York: 4%
  9. South Dakota: 4%
  10. Virginia: 4.15%
Which States Charge the Least, Most in Car Taxes

Which States Don’t Charge Sales Tax On Cars?

There are also a number of states that don’t charge sales tax on vehicle purchases. These states are:

  • Oregon
  • New Hampshire
  • Montana
  • Delaware
  • Alaska

If you live in one of these states, you won’t need to worry about paying sales tax when you purchase a new vehicle.

Vehicle Sales Tax Rates By County/City

Looking at the sales tax rates will give you a general idea of which states charge the most and least. However, it must be noted that vehicle sales tax rates typically vary by city or county, which means the sales tax rate doesn’t tell the whole story.

For example, the state sales tax rate in Florida is 6%. However, the state allows local governments to collect up to an additional 1.5% on purchases. This means some cities in Florida, including Tampa and Jacksonville, have a 7.5% sales tax rate. If you register your vehicle in one of these cities, you will be charged the 7.5% rate instead of the state-wide 6% rate.

For this reason, it’s important to look at the local sales tax rate rather than the state sales tax rate when determining how much you will need to pay after purchasing a vehicle.

Which States Charge the Least, Most in Car Taxes

Can You Save Money By Buying Your Vehicle in Another State?

There’s no doubt that some cities, counties, and states charge higher sales tax rates on vehicle purchases than others. If you live in an area with a high sales tax rate, you might be wondering whether you can save money by purchasing a vehicle in an area with a lower sales tax rate.

For example, if you live in California, which has one of the highest sales tax rates in the country, you may be tempted to cross state lines and purchase a vehicle in Oregon, which does not charge sales tax on vehicle purchases.

However, purchasing a vehicle in an area with a low sales tax rate does not necessarily mean you will save money. The reason for this is simple. The sales tax rate you are charged will depend on where you register your vehicle, not where you purchase it. 

If you purchase the vehicle in Oregon, you will still need to register it in your home state of California, which means you will be charged the local sales tax rate, not Oregon’s sales tax rate.

The bottom line? You can’t avoid paying sales tax on your vehicle simply by traveling to a state that charges a lower sales tax rate or does not charge sales tax at all.  

How to Save Money On Taxes When Buying A Car

Traveling to an area with a lower sales tax rate won’t help you save money on taxes when buying a car. Fortunately, there are a number of other ways to reduce your tax bill when you purchase a vehicle. You may qualify for a tax break if:

  • You are disabled. If you meet your state’s definition of “disabled,” you may be exempt from paying sales tax on your vehicle regardless of what the sales tax rate is in your city or county.
  • You’re buying an older car. If your vehicle was manufactured prior to 1973, it is classified as a historic vehicle, which means it is exempt from sales tax.
  • You’re moving to another state. If you’re planning on permanently moving to a state that does not charge sales tax on vehicle purchases, you won’t have to pay sales tax on your vehicle. However, the move must take place within 90 days from the date the vehicle was purchased.
  • You itemize your deductions. If you itemize your tax deductions, you may be able to deduct your vehicle sales tax expenses. However, if you deduct your sales taxes, you cannot deduct your state or local income taxes, so make sure you run the numbers to determine which option is best for you.
  • You use your vehicle for business purposes. If you purchased a vehicle to use for business purposes, you may be able to deduct a certain percentage of the cost. The vehicle must meet certain requirements, so discuss this with your accountant to figure out if you qualify. 

You may also qualify for tax credits at the state and federal level if you purchase an electric vehicle

For example, if you purchase a new electric or plug-in hybrid vehicle, you may be eligible for a federal tax credit of up to $7,500. The credit amount will vary depending on the vehicle’s battery capacity. You will still have to pay sales tax on your vehicle, but getting this tax credit will offset the cost.

You must meet certain requirements to qualify for this federal tax credit. For instance, the IRS will only allow the original buyer of the electric vehicle to claim this tax credit. If you purchase a used electric vehicle, you won’t qualify for this federal tax credit since you are not the original buyer. Talk to your accountant to learn about other conditions you must meet to take advantage of this credit.

Some states also offer financial benefits to people who purchase electric or hybrid vehicles. In California, for instance, you can earn a rebate of up to $1,000 if you purchase a plug-in hybrid electric vehicle. The rebate increases to $2,000 if you purchase an electric vehicle and $4,500 if you purchase a fuel cell electric vehicle. Just like the federal tax credit, this rebate won’t eliminate your sales tax bill, but it will help you pay for it.

If you live in California, you may also qualify for the state’s Clean Fuel Reward. This financial reward is available to anyone who buys a new electric vehicle with a battery capacity greater than 5kWh. The vehicle must be purchased from a participating retailer and registered in the state of California. If you qualify, you could receive an instant reward of up to $750, which you can use to cover a portion of your sales taxes. 

Before you start shopping for a new car, do your research to figure out if your state offers any financial incentives for purchasing an electric or plug-in hybrid vehicle.

Which States Charge the Least, Most in Car Taxes

Which States Have the Highest and Lowest Car Ownership Costs?

Sales tax isn’t the only expense you will incur if you own a vehicle. There are a number of other vehicle ownership costs, including the cost of fuel, insurance, maintenance and repairs, and registration. Just like sales tax rates, these ownership expenses can vary depending on where you live. In other words, it’s much cheaper to own a car in some states than it is in others. 

According to one study, Louisiana has the highest car ownership costs of all 50 states. In Louisiana, you should expect to pay these expenses if you own a vehicle:

  • Taxes: $3,615
  • Insurance: $2,113
  • Maintenance and repair: $389
  • Fuel: $1,051
  • Registration: Varies depending on the sales price of the vehicle
  • Title costs: $69
  • Vehicle property tax: $38

In sum, the average annual cost of owning a vehicle in Louisiana is about $14,965.

This same study found that Oregon has the lowest car ownership costs of all 50 states. On average, Oregon vehicle owners pay:

  • Taxes: $0
  • Insurance: $1,220
  • Maintenance and repair: $390
  • Fuel: $1,085
  • Registration: $86
  • Title costs: $77
  • Vehicle property tax: $0

In sum, the average annual cost of owning a vehicle in Oregon is about $10,510.

Now you should have a better understanding of how much you will need to pay in sales tax and other ownership costs once you purchase a vehicle. Keep this information in mind to ensure you choose a vehicle that you can afford.