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How to Figure Out the Cost of Taxes on Your Car

By: Kristen Hall-Geisler  | 

Car Leasing Taxes

A sales representative explains a leasing contract to a customer at the Bob Maxey Ford dealership in Detroit.
A sales representative explains a leasing contract to a customer at the Bob Maxey Ford dealership in Detroit.
AP Photo/Carlos Osorio

Leasing a car requires a slightly different budget from buying a car, with a first payment, a security deposit, a bank fee and more all due at signing. Unlike a standard car purchase, a lease requires a tax to be paid on the down payment (that is, if you're required to make one) and on monthly payments. Like a standard car purchase, these are sales taxes levied by the state and individual municipalities.

Lots of car commercials put monthly lease payments in big numbers at the end of the ad. Right underneath that enticingly low monthly number, however, is a dollar amount for cash due at signing. This includes all the fees associated with leasing a car and the taxes due on the down payment. Some states also tax the fees you pay at signing.

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Each month, your payment will be taxed, too. While this sounds sneaky and terrible, it's not so bad. This way, you're only paying taxes on the car for as long as you lease it. A couple of states, like Illinois and Texas, do require you to pay the full amount of the sales tax up front. This tax can be rolled into the amount of the monthly lease payment [source: LeaseGuide.com].

The bottom line is this: Whether you're purchasing a new or used car or leasing a car for a specified time, state and local sales taxes will be applied. It's probably best to know what your local tax rate is and add it to your budget before you even begin shopping for a new car. That way, you're sure to minimize surprises on the day you drive your new car home.

For more information about automobile taxes and other related topics, follow the links below.

Originally Published: Jul 14, 2010

Taxes on Car FAQ

How do I calculate taxes and fees on a used car?
Taxes and fees on a used car will vary from state to state -- and even county to county within your state. To get a good estimate, you'll want to multiple the local sales tax rate by the purchase price of the used car you're considering.
Do you have to pay taxes on a car you own?
In some states, you may have to pay taxes on a car you already own. Any state that charges personal property tax may levy additional property taxes on a car you've purchased. You may also be subject to annual taxes when you renew your car's registration.
How do you figure sales tax on a new car?
To determine the sales tax total on a new car, multiply the price of the new car by the local sales tax rate.
How do I avoid paying taxes on a car?
If your state charges sales tax, the only way to avoid paying that tax is to purchase a car in a state that doesn't charge sales tax. However, your purchase may still be eligible for other taxes, like annual registration taxes.
How much are taxes, titles, and fees on a used car?
Taxes, titles, and other fees on a used car vary quite a lot. Your state and county will determine the applicable taxes, titles, and fees that can be charged on the purchase of a new car.

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Sources

  • Auto Spies. "If Obama Wins, Will He Reinstitute the Luxury Tax?" Oct. 26, 2008. (July 1, 2010) http://www.autospies.com/news/If-Obama-Wins-Will-He-Re-Institute-The-Luxury-Tax-36582/
  • CCH Incorporated. "Excise Taxes." 2003. (July 1, 2010)http://taxguide.completetax.com/text/Q13_2811.asp
  • DMV Answers. "I Need to Calculate Car Sales Tax." Jan. 25, 2010. (June 28, 2010) http://dmvanswers.com/questions/285/I-need-to-calculate-car-sales-tax
  • IRS.gov. "Manufacturers Taxes." (July 1, 2010) http://www.irs.gov/publications/p510/ch05.html#en_US_publink1000117253
  • LeaseGuide.com. "The Guide to Leasing." (June 28, 2010)http://www.leaseguide.com/lease09.htm
  • North Carolina Department of Transportation. "Motor Vehicle Property Tax." (June 28, 2010) http://www.ncdot.org/dmv/vehicle_services/registrationtitling/taxproperty.html
  • Reed, Phillip. "What Fees Should You Pay?" Edmunds.com. (June 28, 2010) http://www.edmunds.com/advice/buying/articles/117494/article.html
  • State of Alaska. "Taxation and Assessment." Nov. 11, 2002. (July 1, 2010) http://www.commerce.state.ak.us/dca/LOGON/tax/tax-sales.htm
  • TaxAdmin.org. "State Sales Tax Rates and Vendor Discounts." Jan. 1, 2010. (July 1, 2010) http://www.taxadmin.org/fta/rate/vendors.pdf