Is it possible to (legally) avoid tax when buying a car if you don't live in a no-sales-tax state like Montana?
Not too long ago, an online influencer gave some advice to his followers.
After lamenting the $20,000 sales tax bill he paid when he bought his Lamborghini Urus, he said that if he'd just bought the car in Montana — where there's no sales tax — he could have saved $20,000.
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Sounds like a great deal right? Unfortunately, a tax attorney on YouTube took a different view.
Jasmine DiLucci, JD, CPA, EA, who is on YouTube as @taxleverage, replied to the influencer's hot take with some advice of her own.
"If you buy a car in Montana and then drive it back to your home state, you owe use tax in your home state at the exact amount that you would have paid had you just paid the sales tax in your home state." she said in her YouTube video. "So the next time this guy recommends tax evasion, he shouldn’t document it on social media."
DiLucci is, unsurprisingly, correct. You can't just buy a car in a tax-free state and bring it back home, expecting a tax break. If you buy at a dealer, they'll likely register it in your home state and you'll have to pay taxes from the start.
And if you buy from a private party, most states will require you to register your vehicle purchased outside your state's borders shortly after bringing them back home. At that time, the DMV will charge you any taxes due.
So can you legally avoid taxes when buying a vehicle? Here's what you need to know.
Avoiding taxes typically isn't possible
For most people, the only way to avoid paying sales taxes on a car purchase is to buy a car in a state without a sales tax. These states include:
Alaska
Delaware
Montana
New Hampshire
Oregon
However, while these states may not charge sales tax, some do charge other taxes when buying, registering, or operating a vehicle. For example, in Oregon, vehicle dealers must pay a Corporate Activity Tax (CAT) and Vehicle Privilege Tax. Dealers may pass these costs onto consumers.
The bottom line is, the government wants to collect revenue, and charging customers who buy cars is generally a good way to do it.
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Exemptions and exceptions
Of course, there are exceptions to every rule. While the details vary by state, you can sometimes avoid taxes on a vehicle purchase in the following situations:
If the vehicle is very old
If the vehicle is used for agricultural purposes
If you are disabled and qualify for a sales tax exemption
If the vehicle has a very low value
Check with your state's DMV or Department of Revenue to find out what exemptions you qualify for. Be sure you legitimately meet the requirements though, as you don't want to commit tax evasion (or, if you do, at least don't document it on social media, as DiLucci warned against).
You may be able to reduce sales tax with this technique
There is some good news for those who want to take home a new set of wheels without a big tax bill. While you can't eliminate sales tax if your state charges it, you can sometimes reduce it.
That's because most states allow you to subtract the value of your trade-in vehicle from the sales price of your new vehicle before taxes are calculated.
So if you're buying a car worth $30,000 and your trade-in is worth $20,000, you'd be charged taxes only on the $10,000 difference between your new vehicle and your old one.
Depending on where you live, there may be caps on the amount you can deduct. Still, this rule often means that you benefit from trading in your old car with the dealer you buy your new one from.
Ultimately, though, you do need to be prepared for the Department of Revenue to come calling when you buy a car. So, be sure you factor sales tax into your budget when deciding what you can afford.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.