Motor Vehicles

There are a couple of special rules regarding motor vehicles and sales and use taxes that bear mentioning.

1. In some states, motor vehicles are exempt from sales and use tax! This isn't a windfall for you; they just have a separate motor vehicle tax that looks and smells like a sales tax. Sometimes the rates are different. And the rules are certainly different.

2. Let's say you are a resident of state A and you're buying the car in state B. Many states, including B, will not charge you their sales tax, if you provide reasonable assurance that you're going to take the car right back to state A, where you live. State B knows that you're going to register it there, so it's not like you're evading sales taxes. And this gives the car dealers in state B more potential customers in state A.

You often see this in states with cities right along the border with other states. And usually state B's sales tax rate is higher than state A's. If this exemption didn't exist, then nobody in his right mind would leave state A and go over to state B to buy a car. So by giving this exemption, the car dealers in State B are now on a level playing field with the car dealers in state A.

3. Most states will recognize that it would be mean to tax you again on a car that you bought in another state. Let's say that you bought a car in state T while you were living there. Then you move to state W. When you go to get the plates for your car in state W, they're going to want to assess you use tax on the car that you have brought into their fair state. But if you've saved the paperwork, you'll be able to show that you already paid sales tax on the vehicle in state T. State W will usually give you a credit for the taxes you've already paid.

Example: You bought the car for $20,000 in state T and the rate was 7%. So you paid $1,400 sales tax. The rate in state W is 9%. So you'll pay 2% (the difference in the rates) of $20,000 - $400. That's some money, but it's better than paying the full 9%. And you really haven't been double taxed. You just made the mistake of moving to a state where the taxes are higher.

4. Finally, we come to occasional sales. If Mike sells a car out of his driveway to Jane, Mike is making an occasional sale. Mike doesn't have to charge Jane sales tax because he's not a retailer of cars. However, Jane is going to have to register this car. When she does, the clerk at the counter will ask to see the bill of sale. And he'll notice that no taxes were charged. Jane will have to pay the use tax on her car, since she didn't pay sales tax when she bought it.

The state normally has no way of capturing sales tax revenue in occasional sales. So they just make occasional sales exempt. But when it's an occasional sale of an item that has to be registered, then they can now get their money when Jane registers it. Yay!

A word about terminology. While the tax that Jane will have to pay is really a use tax, the states almost invariably call this tax sales tax. I'm pretty sure it's just so they don't have to have an argument with Jane about this weird tax she's never heard of. But Jane knows all about sales tax so she's less like to ruin the poor clerk's day.

Also, there is a big exception in most states for intra-family transfers of vehicles. In an occasional sale between the parents and children, the transaction is almost always exempt. Some states also include grandparents, uncles, siblings, step parents, etc. But at a minimum, the exemption will include parent to child.

As always, check your state laws to see what the specific rules are that apply to you.

Sales Tax Guy

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