Purchasing a vehicle in California comes with certain tax obligations, and understanding the nuances of automobile sales tax, particularly the “use tax,” is crucial for every buyer. This guide clarifies the California use tax, when it applies, how to calculate it, and available exemptions.
What is California Use Tax?
In California, sales tax is typically applied to retail sales of tangible personal property, including vehicles, when sold by a California dealer. However, “use tax” is a counterpart to sales tax, designed to apply when sales tax is not collected at the time of purchase.
You generally owe use tax in California when you:
- Purchase a vehicle from an out-of-state seller.
- Buy a vehicle from a private party.
- Purchase from a California dealer, but take delivery of the vehicle out of state.
Essentially, if you bring a vehicle into California for use, and California sales tax wasn’t paid to a dealer at the point of sale, you are likely responsible for use tax. This ensures that vehicles used in California are taxed similarly, regardless of where they were purchased.
Paying Your Use Tax
Typically, the easiest way to pay your use tax is when you register your vehicle with the Department of Motor Vehicles (DMV). The DMV will calculate and collect the use tax as part of the registration process.
However, there are situations where you might need to pay the use tax directly to the California Department of Tax and Fee Administration (CDTFA). This is necessary if you:
- Purchased a vehicle but haven’t registered it yet.
- Did not pay use tax to the DMV during registration.
In these cases, you can conveniently report your vehicle purchase and pay the use tax online through the CDTFA’s online services. Look for the option to File a Return or Claim an Exemption for a Vehicle, Vessel, Aircraft, or Mobile Home under “Limited Access Functions.”
Payment Deadline: Your use tax payment is due on or before 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.
Calculating the Use Tax Rate
The use tax rate in California is identical to the sales tax rate. This rate is not fixed statewide; it varies based on the location where you register your vehicle. This location-based rate considers city, county, and district taxes.
To find the precise tax rate for your address, you can use the CDTFA’s online tools:
- Find a Sales and Use Tax Rate Webpage: https://maps.cdtfa.ca.gov/ – Enter your address to determine the current rate.
- California City & County Sales & Use Tax Rates Webpage: https://www.cdtfa.ca.gov/taxes-and-fees/rates.aspx – Access lists of current and historical tax rates for different jurisdictions.
Determining the Taxable Amount
The total purchase price of your vehicle is subject to use tax. This is a comprehensive figure that includes all forms of payment, not just cash. The taxable amount encompasses:
- Cash payments
- Checks
- Loan or debt assumptions
- Fair market value of traded property or services
Let’s look at some examples to clarify how the taxable amount is determined:
Example 1: Loan Assumption
If you take over car payments for a friend and they transfer the car’s ownership to you, the use tax is calculated on the outstanding loan balance at the time you assume the debt, plus any additional cash you pay. Even if no cash changes hands and you only assume the loan, use tax is still applicable on the loan balance.
Example 2: Vehicle Trade-in Plus Cash
Suppose you buy a car for $5,000 and pay by trading in your old vehicle valued at $3,000 and $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 (No Cash)
If you exchange vehicles with another person, and no money is exchanged, the use tax is based on the fair market value of the vehicle you traded away. If your traded vehicle is valued at $5,000, that amount is considered your purchase price for the new vehicle, and use tax applies to that $5,000.
Example 4: Vehicle for Services
Imagine you purchase a car from someone who agrees to accept your services, like painting their house, in exchange. If your painting service is typically valued at $5,000, you owe use tax on that $5,000 value of the service.
Credit for Taxes Paid to Another State
If you paid sales tax or use tax to another state when you purchased your vehicle, you might be eligible for a credit against your California use tax liability.
For instance, if you paid $1,500 in sales tax in another state and your California use tax is calculated to be $2,000, you would only owe the difference of $500 to California. You will need to provide proof of tax paid to the other state to claim this credit.
Incorrect Tax Amount Paid at the DMV
If you believe the DMV charged you an incorrect amount of use tax, you should contact the CDTFA to resolve the issue. This might happen due to an incorrect tax rate applied or an error in calculating the purchase price.
- Overpayment: If you overpaid, you can file a refund claim with the CDTFA. Use their online services and select 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, available on the CDTFA website.
- Underpayment: If you underreported the purchase price to the DMV and paid too little use tax, you can make an additional payment through the CDTFA’s online services by selecting File a Return or Claim an Exemption for a Vehicle, Vessel, Aircraft, or Mobile Home.
Use Tax on Lease Buyouts
Purchasing your leased vehicle at the end of the lease term, known as a lease buyout, is also subject to use tax.
In many lease buyout situations handled through a dealership, the dealer will collect the use tax. However, if you deal directly with the bank or leasing company for the buyout, they might not collect the tax. In such cases, you are responsible for paying the use tax to the DMV when you register the vehicle in your name.
Resale Exemption for Lease Buyouts: If you buy out a lease and then resell the vehicle to a third party within 10 days, transferring title and registration directly to the buyer, the initial lease buyout is considered a “sale for resale” and is not subject to tax. However, use tax will apply if you use the vehicle personally before reselling it, or if you gift the vehicle instead of reselling it.
Exemptions and Exclusions from Use Tax
California law provides several exemptions and exclusions from vehicle use tax. If you believe you qualify for an exemption, the DMV might require a use tax clearance certificate from the CDTFA before registering your vehicle without tax payment.
To apply for a use tax clearance certificate (CDTFA-111), you can use the CDTFA’s online services and select Request Use Tax Clearance for Registration with DMV/HCD. You can also submit form CDTFA-106, Vehicle/Vessel Use Tax Clearance Request, to the CDTFA.
Here are some common exemptions and exclusions:
Gifts
Vehicles received as gifts are exempt from use tax. To qualify as a gift, the vehicle must be given freely without any exchange of payment, property, services, or assumption of liabilities. A signed statement from the donor confirming the gift and the vehicle’s title are needed for documentation.
Family Transactions
Purchases from certain qualifying family members who are not in the business of selling vehicles are exempt. Qualifying family members include:
- Parents
- Grandparents
- Children
- Grandchildren
- Spouses or registered domestic partners
- Siblings (related by blood or adoption), if both are minors at the time of sale.
This exemption does not extend to stepparents, stepchildren (unless a natural parent/child relationship or legal adoption exists), or transactions between ex-spouses after divorce. Documentation like birth certificates, marriage licenses, or adoption papers, along with the vehicle title, are required to prove family relationship.
Involuntary Transfers
Vehicles acquired through involuntary transfers of ownership are exempt. These are situations beyond your control, such as:
- Court orders
- Divorce property settlements
- Inheritance from an estate
- Vehicle repossession (if you were the seller and are repossessing it)
Official court documents, property settlement papers, or repossession certificates, along with the vehicle title, are needed as proof.
Military Personnel
Active duty military personnel transferred to California on official orders may be exempt if they purchased and took delivery of the vehicle outside California before receiving their transfer orders. If delivery is taken in California or the vehicle is bought for use in California after receiving orders, use tax applies. Military transfer orders, purchase contract, and vehicle title are required documents.
Vehicles Not Purchased for Use in California
If you buy a vehicle for use outside of California, it might be excluded from use tax. However, if a vehicle purchased out-of-state is brought into California within 12 months of purchase, it’s presumed to be purchased for use in California and subject to tax under certain conditions:
- Purchased by a California resident.
- Registered with the California DMV within 12 months.
- Used or stored in California more than half the time within the first 12 months (if purchased by a nonresident).
This presumption can be overcome with documentation proving out-of-state use, such as purchase contracts, seller statements confirming out-of-state delivery, out-of-state registration, insurance documents, tax payment to another state, and records of vehicle use outside California (receipts, statements, etc.).
Warranty or Repair Exception: Bringing a vehicle into California within 12 months for warranty or repair service for 30 days or less does not trigger the presumption of California use.
Interstate or Foreign Commerce
Vehicles purchased for use in interstate or foreign commerce may be exempt. To qualify, you must prove:
- Delivery taken outside California.
- First functional use (use for its intended purpose, like hauling cargo for a commercial truck) occurred outside California.
- At least half of the vehicle’s mileage in the first six months after entering California is commercial miles in interstate or foreign commerce.
Detailed documentation, including purchase contracts, seller statements, bills of lading, driver logs, fuel receipts, and more, are necessary to support this exemption. Motor carriers should keep records for at least eight years.
Trucks and Trailers Used Exclusively in Interstate or Foreign Commerce (AB 321 Exemption)
California law (Assembly Bill 321) provides a sales and use tax exemption for certain new, used, or remanufactured trucks and trailers used exclusively out-of-state or in interstate/foreign commerce. This exemption is operative from January 1, 2020, through December 31, 2023. Refer to Special Notice, Assembly Bill 321 Expands Sales and Use Tax Exemption to Include Trucks Used Out-of-State or in Interstate or Foreign Commerce for specifics.
Purchases by American Indians for Use on a Reservation
American Indians residing on reservations may qualify for use tax exemption if:
- Ownership transfer occurs on the reservation.
- Vehicle delivery is taken on the reservation.
- The vehicle is used on the reservation more than half the time in the first 12 months.
Documentation includes purchase invoices showing delivery location and date, vehicle title, and proof of American Indian status and reservation residency (Tribal ID, proof-of-residency letter, etc.).
Farm Equipment (Partial Exemption)
Vehicles used exclusively in agricultural production and harvesting might qualify for a partial use tax exemption. This exemption applies only to the state portion of the tax (currently 5.00%). The vehicle must be:
- Used by a qualified person (farmer).
- Used 100% for agricultural production.
- Qualify as farm equipment (implement of husbandry under California Vehicle Code).
Documentation needed includes income tax returns (Schedule F), DMV registration showing “implement of husbandry,” bill of sale, and vehicle title. See Regulation 1533.1, Farm Equipment and Machinery and publication 66, Agricultural Industry for detailed information.
Purchases for Use Solely Outside of California
If your only use of a vehicle in California is to remove it from the state for sole use outside California, and you do not register it in California, you may be excluded from use tax. This applies to purchases from private parties (not licensed dealers subject to sales tax). A One-Trip Permit from the DMV might be used instead of registration for this purpose.
Use Tax Verification for Other States
If you move out of California and need to register your vehicle in another state, that state might request verification of California tax payment. The CDTFA can provide this verification. Use their online services and select Verify a Sales and Use Tax Payment to request verification.
Understanding California’s automobile use tax is essential for compliance and avoiding penalties. By knowing when use tax applies, how to calculate and pay it, and available exemptions, you can navigate vehicle purchases in California with confidence. Remember to consult the CDTFA website or a tax professional for personalized advice and the most up-to-date information.
