What Are The Tax Implications Of Buying A Car With Cash?

When buying a car from a private seller, you pay sales tax on your purchase—unless you live in a tax-free jurisdiction. You owe the same tax whether you pay cash or use bank financing.

When you register your car with the DMV, you’ll also owe additional fees for registration, license plates, and title transfer.

The term “paying in cash” has two different meanings:

1. Paying with physical currency—bills printed by the US Treasury as legal tender—as opposed to check, credit card, or other payment method.
2. Paying for a car with money you already have instead of taking out a loan. The money doesn’t have to be in paper form, as in a hefty wad of hundred-dollar bills. In this sense of “paying in cash,” a check or bank wire would also qualify.

In either sense of “paying in cash,” you’ll pay the same taxes and fees regardless.

Depending on your city, county, and state, you may owe sales tax on your vehicle purchase. Beyond sales tax, you don’t have any other tax implications.

When you buy a car, you owe the same sales taxes whether you pay with a check, bank wire, or any other means of money transfer. Tax law does not discriminate based on your payment method.

Check with your local DMV (or equivalent agency) to learn how much sales tax you’ll owe. Our free sales tax calculator can also help you get an idea of your tax liability.

Here are the ways you can avoid paying sales tax on your next car purchase:

1. Qualify for an exemption. Check with your state for specifics, but most states have exemptions for religious organizations, government agencies, and other categories. Don’t qualify? You’re not alone. The exemptions are designed to apply to a small minority of citizens.
2. Move to a state with no sales tax and buy a vehicle there. Or don’t: the cost of the move probably won’t justify the tax savings. Although, if you were going to move to a tax-free state anyway, it wouldn’t hurt to defer your car purchase until after you settle in.

That’s about it. Most of us are stuck paying sales tax.

Five states don't charge sales tax on vehicle purchases. Individual counties and municipalities may still levy taxes in these states.

1. Alaska
2. Delaware
3. Montana
4. New Hampshire
5. Oregon

Some states claim to have no sales tax as an exercise in semantics. For example, Delaware charges a "motor vehicle document fee" that is calculated as a percentage of the purchase price, making it a sales tax in all but name.

Three states—Arizona, Hawaii, and Nevada—charge sales tax on dealership vehicle sales but not on private party sales. As if there weren’t enough advantages of buying a private-party car, now there’s one more in these states.

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