How is a car taxed?

Buying, leasing or owning a car usually means owing some type of car tax.

Whether you need to pay a tax on your vehicle depends on state and local law. It may be determined by where your car is registered or where your car is used. The tax you may owe is usually based on the car’s value. If you don’t agree with an assessment, you may be able to challenge it.

It’s important to understand the types of vehicle taxes you may owe so that you can plan for those costs. This guide will explain some common car taxes to help you decide if a car is affordable for you.

What types of car taxes can I be charged?

Car taxes can take different shapes depending on the state, county and municipality. In some cases, you may need to pay a tax to both your state and local governments.

Sales tax

When you purchase or lease a new or used car, you’ll probably have to pay a sales tax or use tax. For example, in Florida you must pay a 6% sales tax for vehicles purchased, including cars, trucks, motorcycles and truck tractors. Some municipalities and counties also charge a sales tax on top of that.

A sales tax is typically due whenever a vehicle’s ownership changes hands during a purchase. That includes a purchase from a dealer or a sale between private parties. Check to see if your state has an exemption for vehicle transfers between close family members or cars given as gifts.

Buying a car out of your state typically won’t save you from paying a sales tax. You must follow the tax rules of the state where you register the vehicle and pay any taxes when you bring the car back home.

The sales tax may be due at the time of purchase or when you register the vehicle. When you lease a vehicle, the sales or use tax you pay is set by the state or county where your vehicle is registered.

Personal property tax

Depending on your state or municipality, you may also owe a personal property tax or excise tax. These taxes are usually paid yearly based on the current value of your car.

About half of all states charge a vehicle property tax, according to a 2019 WalletHub article.

Some municipalities also charge car owners annual taxes. In Boston, for example, residents pay an annual excise tax of $25 per thousand dollars of a car’s value. This tax is in addition to the vehicle sales and use tax that Massachusetts charges.

If you owe an excise or personal property tax, you’ll generally be sent a tax bill and must pay by the deadline.

How are vehicle taxes calculated?

As a general rule, your car’s tax — which can be influenced by a number of factors — is usually calculated in part by multiplying the tax rate by the value of your vehicle. The exact formula depends on what type of tax you’re paying — such sales tax or property tax, for example — and which state- or municipality-specific tax rates are applicable.

Calculating your car’s sales tax

Your car’s sales and use tax is typically based your vehicle’s purchase price, but other factors, such as the category of vehicle you have, can also affect this. Depending on the state and city’s tax rates, you may need to pay a sales tax on the vehicle itself and any accessories included with the car.

The tax rates where you live determine how much your total bill will be. For example, for sales and use tax in Virginia, you pay either $75 or 4.15% of the vehicle’s gross sales price, whichever is greater. If you have an electric vehicle, you will also have an additional $64 fee — excluding mopeds.

Calculating the personal property or excise tax on a car

If a state or municipality charges an excise or personal property tax on your vehicle, it also sets the rules for how your car is valued.

For example, in Boston, the Massachusetts Registry of Motor Vehicles determines values for the purpose of calculating excise tax.

But in Fairfax County, Va., the county typically uses J.D. Power’s National Automobile Dealers’ Association Official Car Guide to determine a vehicle’s value.

Once your vehicle’s valuation is determined, you pay the applicable tax rate based on that value. This varies based on your state or municipality’s rules. In Fairfax County, the property tax you’d pay on most vehicles would be $4.57 for each $100 of assessed value. A vehicle valued at $20,000 and taxed at this rate would be charged an annual tax of $914.

In Boston, you pay $25 per $1,000 in vehicle value, so a $20,000 vehicle would result in a tax of $500.

Property owners may have the opportunity to challenge valuations by filing an appeal.

Why do I have to pay a car tax?

Each state, county and municipality determines what it uses your tax payments for. For example, the taxes may be used to fund road maintenance and construction costs.

Bottom line

You want to know both state law and local rules for car taxes so you can understand the total tax you’ll owe. Your state’s Department of Revenue is a good place to start. Your state’s DMV can also provide information about taxes you may owe.

Be sure to understand these taxes upfront to help you understand the true cost of owning a car.

Calculate your sales tax

Use our sales tax calculator to find out the sales tax rate in your area and how much sales tax adds to the price of something you buy.