Wednesday, October 20, 2010

FAQ: Why do I have to pay sales tax when I buy a used car?


This question came up on Twitter a couple of days ago.  It's a frequent query, so I thought I'd respond to it here: 

I'm not a "taxes are evil" guy. That said, charging sales tax on a used car seems weird. Hasn't it been sold already?"

The thing to remember is that sales tax is not a one-off tax.  Most people think it is, but it's really not.  Think about the name of the tax.  It's called a "sales" tax.  That means that every time it's sold, sales tax applies.  So when the car is sold new, there's sales tax.  When the dealer sells it used a few years later, there's sales tax.  And when it's sold a few years after that, there's sales tax. 
Obviously, the amount of the tax will go down every time the car is sold, but it's still subject to sales tax every time it's sold.  

It's the same way with other stuff.  Say you buy a painting at a art dealer.  She'll charge you sales tax.  A few years later, you discover it's incredibly valuable and you have an auction house sell it for a million dollars.  They'll have to charge sales tax to whoever buys it.  Even though you already paid sales tax on it.

Because every time there's a sale, there's sales tax.

There's one exception, and that's occasional sales.  But let's keep it simple for now.

The Sales Tax Guy

See the disclaimer - this is for education only.  Research these issues thoroughly before making decisions.  Remember: there are details we haven't discussed, and every state is different.  Here's more information

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