Buying a car in California involves more than just the purchase price; understanding Sales Tax On A Car In California is crucial for budgeting and avoiding unexpected costs. While often referred to as “sales tax,” California primarily levies a use tax on vehicle purchases, especially when sales tax isn’t collected at the point of sale by a California dealer. This comprehensive guide, based on official California Department of Tax and Fee Administration (CDTFA) guidelines, clarifies everything you need to know about car sales tax in California, ensuring a smooth and informed car buying experience.
When Do You Owe Sales Tax (Use Tax) on a Car in California?
Generally, you are obligated to pay use tax on a vehicle purchased for use in California if you haven’t already paid California sales tax to a dealer. This typically occurs in scenarios like:
- Purchasing from Out-of-State Sellers: When you buy a vehicle from a dealer or private party located outside of California.
- Private Party Sales: Buying a car from an individual seller in or out of state.
- Out-of-State Delivery from California Dealers: If you buy from a California dealer but take possession of the vehicle outside of California.
Unless specific exemptions or exclusions apply, this use tax is mandatory. In most cases, you’ll conveniently pay this tax when you register your vehicle with the California Department of Motor Vehicles (DMV).
However, if you acquire a vehicle without immediate registration and haven’t paid the use tax to the DMV, you are required to pay it directly to the CDTFA. The CDTFA offers an easy-to-use online service to report your vehicle purchase and pay the use tax. Simply visit the CDTFA’s online services portal and choose the option to File a Return or Claim an Exemption for a Vehicle, Vessel, Aircraft, or Mobile Home under the Limited Access Functions.
Payment Deadline: It’s crucial to note that your sales tax on a car in California (use tax) payment is due on or before the last day of the month following the month of your vehicle purchase. Failing to meet this deadline will result in penalty and interest charges.
Understanding the Sales Tax Rate for Cars in California
The sales tax rate on a car in California is not a fixed statewide percentage. Instead, the use tax rate mirrors the general sales tax rate and is determined by the address where you register your vehicle. This rate comprises state, county, and city components, leading to variations across different locations.
To find the precise sales tax rate applicable to your vehicle registration address, you can use the CDTFA’s resources:
- Find a Sales and Use Tax Rate Webpage: Utilize the Find a Sales and Use Tax Rate tool on the CDTFA website to look up the current rate for a specific address.
- California City & County Sales & Use Tax Rates Page: Refer to the California City & County Sales & Use Tax Rates webpage for lists of current and historical tax rates in different jurisdictions.
Staying informed about the correct sales tax rate ensures accurate budgeting when purchasing a vehicle in California.
Calculating the Taxable Amount for Car Sales in California
The sales tax on a car in California (use tax) is calculated based on the total purchase price of your vehicle. This “total purchase price” is comprehensive and includes all forms of payment, not just the cash amount you pay upfront. It encompasses:
- Cash payments
- Checks
- Loan or debt payments assumed by the buyer
- The fair market value of any property or services traded, bartered, or exchanged for the vehicle
Let’s illustrate this with some practical examples:
Example 1: Loan Assumption
Imagine you take over the monthly car payments for a friend who can no longer afford their vehicle. In return, your friend transfers ownership of the car to you. Even if you don’t pay any cash upfront, you still owe use tax on the outstanding loan balance at the time you assume the debt. If you also pay your friend cash in addition to assuming the loan, that cash amount is also part of the taxable purchase price.
Example 2: Trade-In Plus Cash
You buy a car for $5,000 and pay using your current vehicle, valued at $3,000, plus $2,000 in cash. The sales tax is calculated on the full $5,000 purchase price, not just the cash portion.
Example 3: Vehicle Trade (No Cash)
You exchange vehicles with another person, and no money changes hands. If the vehicle you traded has a market value of $5,000, this is considered your purchase price for the new vehicle, and you’ll owe use tax on that $5,000 value.
Example 4: Service Exchange
You purchase a car from a private seller who agrees to accept your services as payment. If you typically charge $5,000 for the service you provide (e.g., painting a house), you will owe use tax based on the $5,000 value of your services.
These examples highlight that sales tax on a car in California applies to the total economic value exchanged, not just direct monetary payments.
Credit for Sales Tax Paid in Another State
If you purchased your vehicle in another state and paid sales tax there, California offers a credit to prevent double taxation. You may be eligible to claim a credit for the sales or use tax you previously paid to another state.
For instance, if you paid $1,500 in sales tax in another state and the California use tax on the same vehicle is calculated to be $2,000, you would only owe the difference of $500 to California. You’ll need to provide proof of tax paid to the other state when registering your vehicle in California to claim this credit.
Addressing Incorrect Sales Tax Payments at the DMV
If you believe you were incorrectly charged sales tax (use tax) at the DMV, it’s essential to address it promptly. Incorrect amounts can arise from wrong tax rates or errors in calculating tax on the purchase price.
Overpayment: If you overpaid use tax, you can file a refund claim with the CDTFA. You can do this online through the CDTFA’s online services by selecting Claim a Refund for Tax Paid to DMV/FTB under Limited Access Function. Alternatively, you can complete form CDTFA-101-DMV, Claim for Refund or Credit for Tax Paid to DMV and mail it to the address provided on the form.
Underpayment: If you underreported the purchase price to the DMV and consequently underpaid the use tax, you should make an additional payment to avoid penalties and interest. You can make this payment using the CDTFA’s online services and selecting the option to File a Return or Claim an Exemption for a Vehicle, Vessel, Aircraft, or Mobile Home under the Limited Access Functions.
Contacting the CDTFA directly is recommended if you encounter any issues with sales tax payments made at the DMV.
Sales Tax Implications of Lease Buyouts in California
Purchasing a leased vehicle at the end of the lease agreement, known as a lease buyout, is also subject to sales tax on a car in California (use tax).
In many lease buyout scenarios handled directly through a dealership, the dealer will collect the sales tax. However, if the lease buyout is managed directly with the bank or leasing company without dealer involvement, they might not collect the tax. In such cases, you, as the buyer, become responsible for paying the use tax to the DMV when you register the vehicle.
An exception exists for lease buyouts intended for immediate resale. If you buy out a lease and then sell the vehicle to a third party, transferring title and registration within 10 days of acquiring title from the lessor, the initial buyout is considered a sale for resale and is exempt from tax. However, using the vehicle personally before reselling or gifting it to a third party will make it subject to use tax.
Exemptions and Exclusions from California Car Sales Tax (Use Tax)
California law provides several exemptions and exclusions from sales tax on a car in California (use tax) in specific situations. If you believe your vehicle purchase qualifies for an exemption, the DMV might require a use tax clearance certificate from the CDTFA before registering the vehicle without tax payment.
To apply for a use tax clearance certificate (CDTFA-111), use the CDTFA’s online services and select Request Use Tax Clearance for Registration with DMV/HCD under the Limited Access Functions. Alternatively, you can submit form CDTFA-106, Vehicle/Vessel Use Tax Clearance Request to a local CDTFA field office or the Consumer Use Tax Section in Sacramento.
Here are some common exemptions:
Gifts
Vehicles received as genuine gifts are exempt from use tax. A gift implies a voluntary transfer without any form of payment or exchange. However, if you provide cash, trade property, services, or assume liabilities in exchange for the vehicle, it’s not considered a gift and will be taxable. Similarly, vehicles received as employee bonuses are also not considered gifts for tax purposes. To claim a gift exemption, you’ll need a signed statement from the donor confirming the gift and a copy of the vehicle’s title.
Family Transactions
Purchases from 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 (by blood or adoption, only if both are minors at the time of sale)
This exemption does not extend to stepparents, stepchildren (unless a natural parent or legal adoption is involved), or transactions between ex-spouses after divorce. Documentation like birth certificates, marriage licenses, or adoption papers, along with the vehicle’s title, is required to prove family relationship.
Involuntary Transfers
Vehicles acquired through involuntary transfers of ownership are exempt. These transfers happen due to circumstances beyond your control, such as:
- Court orders
- Divorce property settlements
- Inheritance from an estate
- Vehicle repossession (for vehicles you sold)
Official court documents, property settlement papers, or repossession certificates, along with the vehicle’s title, are needed to support this exemption.
Military Personnel
Active duty military personnel transferred to California on official orders may be exempt from use tax if they purchased and took delivery of the vehicle outside of California before receiving their transfer orders. Taking delivery in California or purchasing after receiving transfer orders will make the vehicle taxable. Military transfer orders, purchase contracts, and vehicle titles are required for documentation.
Vehicles Not Purchased for Use in California
Vehicles purchased for use outside of California may not be subject to 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 taxable if:
- The buyer is a California resident.
- The vehicle is registered with the California DMV within the first 12 months.
- If purchased by a nonresident, the vehicle is used or stored in California for more than half of the first 12 months.
“Functional use” refers to using the vehicle for its intended purpose (e.g., driving a passenger car). To overcome this presumption and claim exemption, you’ll need substantial documentation proving out-of-state purchase, delivery, registration, insurance, tax payment in another state, and evidence of actual use and location outside California during the first 12 months (e.g., receipts, statements).
Vehicles brought into California within 12 months solely for warranty or repair service for 30 days or less are not presumed to be purchased for use in California.
Interstate or Foreign Commerce
Vehicles purchased for use in interstate or foreign commerce may be exempt. To qualify, you must prove:
- Out-of-state delivery
- First functional use 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, load confirmations, bills of lading, driver logs, and fuel receipts, is crucial to support this exemption. Motor carriers should retain these records for at least eight years. You’ll need to register with the CDTFA and file form CDTFA-401-CUTS, Combined State and Local Consumer Use Tax Return for Vehicle.
Trucks and Trailers in Interstate or Foreign Commerce (AB 321 Exemption)
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 details.
Purchases by American Indians for Reservation Use
American Indians residing on reservations may qualify for exemption if:
- Ownership transfers on the reservation.
- Delivery occurs on the reservation.
- The vehicle is used on the reservation more than half the time in the first 12 months.
Documentation includes purchase invoices, vehicle titles, and proof of American Indian status and reservation residency (e.g., tribal ID, residency letter).
Farm Equipment (Partial Exemption)
Vehicles used exclusively in producing and harvesting agricultural products may be eligible for a partial sales tax exemption. This reduces the state portion of the tax (currently 5.00%). The vehicle must be:
- Purchased by a qualified person.
- Used 100% for agricultural production.
- Qualifying farm equipment (implement of husbandry under California Vehicle Code).
Documentation includes income tax returns (Schedule F), DMV registration showing “implement of husbandry,” bills of sale, and vehicle titles. See Regulation 1533.1, Farm Equipment and Machinery, and publication 66, Agricultural Industry for specifics.
Purchases for Use Solely Outside California
If the only use of a vehicle in California is to remove it from the state for exclusive use thereafter outside California, and you don’t 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 may be used instead of registration in this case.
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 require verification of sales tax (use tax) paid to California. The CDTFA can provide this verification. Request it through the CDTFA’s online services by selecting Verify a Sales and Use Tax Payment.
Understanding sales tax on a car in California is essential for any vehicle purchase. By being aware of the rules, rates, taxable amounts, exemptions, and payment procedures, you can navigate the process confidently and ensure compliance with California tax laws. Always refer to the official CDTFA website and publications for the most up-to-date information.
