Purchasing a vehicle in California comes with several considerations, and understanding sales tax is a crucial one. Generally, when you buy a car from a California dealer, sales tax is straightforward. However, situations like buying from out-of-state sellers, private parties, or taking delivery out of state introduce the concept of use tax. This guide will clarify everything you need to know about Sales Tax On A Car In California, focusing on when use tax applies and how to navigate it.
When Do You Owe Sales Tax or Use Tax on a Car in California?
In California, you’re typically required to pay use tax on vehicle purchases if sales tax wasn’t paid to a California dealer. This usually happens in these scenarios:
- Out-of-State Purchases: Buying a vehicle from a seller in another state.
- Private Party Sales: Purchasing a car from an individual, not a dealership.
- Out-of-State Delivery from a California Dealer: If you buy from a California dealer but take possession of the vehicle outside of California.
Unless you qualify for a specific exemption or exclusion, use tax is mandatory. The good news is, you generally pay this tax when you register your vehicle with the California Department of Motor Vehicles (DMV).
However, if you’ve bought a vehicle and haven’t yet registered it or paid the use tax through the DMV, you’ll need to pay it directly to the California Department of Tax and Fee Administration (CDTFA). You can easily report your purchase and pay the use tax online through the CDTFA’s online services. Just look for the option to File a Return or Claim an Exemption for a Vehicle, Vessel, Aircraft, or Mobile Home under the Limited Access Functions.
Remember, your tax payment is due by the last day of the month following the month you purchased the vehicle. Failing to pay on time will result in penalties and interest charges.
Understanding the Use Tax Rate
The use tax rate in California mirrors the sales tax rate. It’s determined by the address where you register your vehicle. This means the rate can vary depending on the city and county within California.
To find the precise sales and use tax rate for your location, you can use the CDTFA’s online tool: Find a Sales and Use Tax Rate. You can also find lists of current and historical tax rates on the California City & County Sales & Use Tax Rates webpage.
Calculating the Taxable Amount: What’s Included in the Purchase Price?
The total purchase price of your vehicle is what’s subject to use tax. This isn’t just the cash you hand over; it encompasses all forms of payment. This includes:
- Cash payments
- Checks
- Loan or debt assumptions
- Fair market value of any property or services traded for the vehicle
Let’s look at some examples to clarify how this works:
Example #1: Loan Assumption
Imagine you take over car payments for a friend who can no longer afford them. In return, your friend transfers ownership of the car to you. Even if you don’t pay your friend any cash directly, you still owe use tax on the outstanding loan balance at the time you assumed the debt.
Example #2: Trade-In with Cash
You buy a car for $5,000 and pay by trading in your old vehicle valued at $3,000 and adding $2,000 in cash. You will owe use tax on the full $5,000 purchase price, not just the cash portion.
Example #3: Vehicle Trade
You trade vehicles with someone else, and no money changes hands. If the vehicle you traded has a market value of $5,000, that’s considered your purchase price for the new vehicle, and you’ll owe use tax on that $5,000 value.
Example #4: Service Trade
You buy a car from a private seller who agrees to accept your services as payment. If you’re a painter and you paint the seller’s house, a service usually worth $5,000, in exchange for the car, you owe use tax on the $5,000 value of your painting service.
Credit for Sales Tax Paid in Another State
If you paid sales tax or use tax to another state when you bought your vehicle, you might be eligible for a credit in California. This prevents you from being taxed twice on the same purchase.
For instance, if you paid $1,500 in sales tax in another state and the California use tax is $2,000, you’ll only owe California the difference, which is $500.
What if You Paid the Wrong Tax Amount at the DMV?
Mistakes can happen. If you believe you paid an incorrect amount of use tax at the DMV, get in touch with the CDTFA directly. This could occur due to an incorrect tax rate or a miscalculation of the purchase price.
If you overpaid, you can file a refund claim through the CDTFA’s online services by selecting Claim a Refund for Tax Paid to DMV/FTB. Alternatively, you can use form CDTFA-101-DMV, Claim for Refund or Credit for Tax Paid to DMV, and mail it to the address on the form.
If you underreported the purchase price and didn’t pay enough use tax, you can make an additional payment online via the CDTFA’s services, using the File a Return or Claim an Exemption for a Vehicle, Vessel, Aircraft, or Mobile Home option.
Lease Buyouts and Sales Tax
Purchasing your leased vehicle at the end of the lease agreement (a lease buyout) is also subject to use tax.
If the bank or leasing company handling the buyout doesn’t collect sales tax, you’ll be responsible for paying the use tax at the DMV when you register the vehicle.
However, if you quickly resell the vehicle within 10 days of your lease buyout, and transfer the title to the new buyer, the buyout might be considered a sale for resale and not taxable. But, if you use the vehicle personally before reselling, or if you gift it instead of reselling, use tax will apply.
Exemptions and Exclusions from California Use Tax
California offers several exemptions and exclusions that could mean you don’t have to pay use tax on your vehicle purchase. The DMV might require a use tax clearance certificate from the CDTFA before registering your vehicle without tax if you claim an exemption.
You can apply for a use tax clearance certificate (CDTFA-111) online through CDTFA’s services (Request Use Tax Clearance for Registration with DMV/HCD) or by submitting form CDTFA-106, Vehicle/Vessel Use Tax Clearance Request, to the CDTFA.
Here are some common exemptions:
Gifts
Vehicles received as genuine gifts are exempt from use tax. For it to be a gift, the vehicle must be given freely without any exchange of payment, property, services, or debt assumption. A signed statement from the giver confirming the gift and the vehicle’s title are needed for proof.
Family Transactions
Purchases from close family members who aren’t in the business of selling vehicles are often exempt. Qualifying family members include parents, grandparents, children, grandchildren, spouses, registered domestic partners, and siblings (if both are minors during the sale). Step-relatives and ex-spouses generally don’t qualify. Documentation like birth certificates or marriage licenses is needed to prove family relationship.
Involuntary Transfers
If you acquire a vehicle due to circumstances beyond your control, like a court order, divorce settlement, inheritance, or vehicle repossession, it’s considered an involuntary transfer and is exempt from use tax. Official documents like court orders or repossession certificates will be required.
Military Personnel
Active-duty military members transferred to California on official orders may be exempt if they purchased and took delivery of the vehicle outside of California before receiving their orders. If delivery or purchase happens in California after receiving orders, use tax applies. Military transfer orders and purchase documents will be needed.
Vehicles Not Purchased for Use in California
If you buy a vehicle for use primarily outside of California, it may not be subject to California use tax. However, if a vehicle purchased out of state is brought into California within 12 months of purchase, it’s presumed to be for use in California and taxable, especially if you’re a California resident or register the vehicle in California within that time. You can overcome this presumption with proof of out-of-state use, registration, and insurance.
Interstate or Foreign Commerce
Vehicles purchased for use in interstate or foreign commerce may be exempt. This applies to commercial vehicles used to transport goods across state or international lines. Specific documentation, including delivery location, functional use location, and mileage logs, is required to prove this exemption.
American Indian Reservation Use
American Indians residing on reservations may be exempt if the vehicle purchase and delivery occur on the reservation, and the vehicle is used primarily on the reservation. Tribal ID and proof of residency are needed.
Farm Equipment
Vehicles used exclusively in farming and harvesting agricultural products might qualify for a partial tax exemption, covering only the state portion of the sales and use tax. The vehicle must be classified as farm equipment, and you’ll need to provide documentation like farm income tax returns and DMV registration as an implement of husbandry.
Purchases for Use Solely Outside California
If the only use of the vehicle in California is to remove it from the state for sole use elsewhere, and you don’t register it in California, you may be excluded from use tax. This typically applies to private party sales, not purchases from licensed dealers. A One-Trip Permit from the DMV may be used in this situation.
Use Tax Verification for Other States
If you move out of California and need to register your vehicle in a new state, that state might ask for verification of California tax payment. The CDTFA can provide this verification. Request it through their online services by selecting Verify a Sales and Use Tax Payment.
Understanding California’s sales and use tax on vehicles can seem complex, but by knowing the rules and exemptions, you can ensure you’re paying the correct amount and avoid any penalties. Always consult the CDTFA website or a tax professional for the most up-to-date information and guidance specific to your situation.
