We all know that new car prices can vary greatly. Factors such as supply and demand, logistics costs, dealer costs, and how much profit they want to make on the car sale can mean hundreds or thousands of dollars in price differentiation. So then where are the cheapest states to buy a car? We look at this question on the basis of sales tax, which can significantly drive up the cost of buying a car.
In the U.S., there is no federal sales tax, but most states have sales and use taxes. States charges taxes on the retail price of goods sold, although there are exceptions. Food sold in grocery stores, prescription medications, and agricultural supplies are exempted most places.
States Set Sales Tax Rates
The amount of retail tax is set by the state. However, local counties and municipalities can also add sales and use taxes on retail goods above and beyond the beyond the general state tax. The amount local jurisdictions can charge is capped by the state. This can significantly drive up the cost of a new car.
For example, in Washington State, where the general state sales tax rate is currently 6.5%, if you live in King County, county and local taxes can add an additional 3% tax on top of the state tax, for a 9.5% rate. This is the maximum sales tax rate in the state and a 9.5% tax rate can mean paying nearly $2,000 in sales tax on a vehicle that costs $20,000.
Local Sales Taxes Can Be Higher Than State Taxes
In some states, the counties and cities are allowed to impose sales and use taxes that are significantly higher than the state rate. For example, in Colorado, currently the state general sales tax rate is 2.9% but counties and cities can add up to an additional 5.1% in taxes, bringing the total in some places in the state to 8%.
In Alabama, the general states sales tax is 4% but can rise to 10% with local taxes. The state is one of three states with a total sales tax rate that currently reaches or exceeds 10%. The state with the highest sales tax rates is Illinois at 11.5% followed by Arizona with a combined rate of 10.6%.
Some States Have No Sales Tax
On the basis of their sales tax rates, the cheapest states to buy a car are Delaware, New Hampshire, and Oregon. These states have no sales tax and do not allow local jurisdiction to add their own taxes. Alaska and Montana have no state sales tax but they allow counties and cities to add up 7% and 3%, respectively, in taxes.
But this does not mean that everyone that lives in Philadelphia will go to Delaware to buy a car and save hundreds or thousands of dollars in tax. They do not get the benefit of paying no tax. Only Delaware residents do. When a Pennsylvanian resident goes to register their new vehicle, they will have to pay the Pennsylvania use tax, which is currently a max of 8%.
However, there are exceptions to this. If you have a second home in another state, and can claim residency in that state, you may be able to register the car in that state. For example, if you live in New York but have a vacation home in New Hampshire, which is one of the cheapest states to buy a car, it may be possible for you to register your vehicle in New Hampshire, and thus avoid sales and use taxes. Check the laws to see if your situation applies.
Save In Your State
If you really want to stretch your car buying dollar, there are ways to save in your state. In addition to compare dealer prices, some determined bargain car buyers may drive over a hundred miles to find a good deal from a dealer and pay less sales tax.
For example, some cities and counties can have sales and use tax rates 1% or more less than other areas in the state. Thus, if you were buying a car that costs $30,000, the difference in tax would be $300.
One other way to save money in your state is to check our Website for low car insurance rates. By comparing rates from leading insurers, you could easily save $300 or more off your current policy.