Purchasing a vehicle is a significant investment, and understanding the associated costs is crucial. In California, beyond the sticker price, you’ll need to factor in sales tax, or more accurately, use tax on your vehicle purchase in certain situations. This guide provides a comprehensive overview of the “Sales Tax On A Vehicle In California,” helping you navigate the rules and regulations effectively.
Generally, California sales tax is applied when you buy a vehicle from a California dealer. However, use tax comes into play when sales tax isn’t initially paid to a California dealer. This typically occurs in scenarios like:
- Purchasing a vehicle from an out-of-state seller.
- Buying from a private party.
- Acquiring a vehicle from a California dealer, but taking delivery outside of California.
Unless a specific exemption or exclusion applies, you are obligated to pay use tax on your vehicle purchase for vehicles intended for use within California. Typically, this payment is made when you register your vehicle with the California Department of Motor Vehicles (DMV).
However, if you’ve acquired a vehicle without registering it and paying the use tax to the DMV, you must remit the use tax directly to the California Department of Tax and Fee Administration (CDTFA). You can easily report your vehicle purchase and pay the use tax through the CDTFA’s online portal. Simply navigate to CDTFA’s online services and select “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 on or before the last day of the month following the month you purchased the vehicle. Failing to meet this deadline will result in penalties and interest charges accumulating.
Understanding the Use Tax Rate in California
The use tax rate mirrors the sales tax rate in California. This rate is determined by the address where you register your vehicle. To find the precise current tax rate for your location, the CDTFA provides helpful online resources:
- Find a Sales and Use Tax Rate Webpage: Use the Find a Sales and Use Tax Rate tool to look up the current rate for your specific address.
- California City & County Sales & Use Tax Rates Webpage: For a comprehensive list of current and historical rates, visit the California City & County Sales & Use Tax Rates page.
These resources ensure you are using the correct tax rate when calculating your vehicle use tax.
Calculating the Taxable Amount for Your Vehicle
The total purchase price of your vehicle forms the basis for calculating use tax. This “total purchase price” is comprehensive and includes various forms of payment:
- Cash
- Checks
- Payment or assumption of a loan or debt
- Fair market value of any property and/or services traded, bartered, or exchanged for the vehicle
To illustrate how the taxable amount is determined, consider these examples:
Example 1: Loan Assumption
Imagine you take over the monthly 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 any cash directly to your friend, you are still liable for use tax. The taxable amount is the outstanding balance of the loan at the time you assumed the debt, plus any cash you paid for the car.
Example 2: Vehicle Trade-In Plus Cash
You purchase a vehicle for $5,000. For payment, you trade in your current vehicle, valued at $3,000, and pay $2,000 in cash. In this scenario, you owe use tax on the entire $5,000 purchase price, not just the cash portion.
Example 3: Vehicle Trade (No Cash)
You trade vehicles with another individual, and no money exchanges hands. If the vehicle you traded has a fair market value of $5,000 at the time of the exchange, this value is considered your purchase price for the new vehicle. You will owe use tax on this $5,000 amount.
Example 4: Vehicle in Exchange for Services
You buy a car from a private seller who knows you are a painter. The seller offers you the car in exchange for painting their house, a service you typically charge $5,000 for. If you agree to this exchange, you owe use tax on the $5,000 value of the painting services you provided.
These examples highlight that use tax is based on the total value exchanged for the vehicle, regardless of the payment method.
Credit for Sales Tax Paid to Another State
If you paid sales tax or use tax to another state when purchasing your vehicle, you might be eligible for a tax credit in California. This credit can offset the amount of California use tax you owe.
For instance, if you paid $1,500 in sales or use tax to another state for the vehicle purchase, and the California use tax due is calculated to be $2,000, you would only owe a balance of $500 to California ($2,000 – $1,500 = $500).
This credit ensures you are not double-taxed on the same vehicle purchase across different states.
Addressing Incorrect Tax Amounts Paid at the DMV
If you believe you were incorrectly charged use tax or paid the wrong amount at the DMV, it’s important to contact the CDTFA directly. Mistakes can happen, such as applying the wrong tax rate or calculating tax based on an incorrect purchase price.
Overpayment of Use Tax: If you overpaid use tax, you can file a claim for refund through the CDTFA’s online services. Select “Claim a Refund for Tax Paid to DMV/FTB” under Limited Access Functions. 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 of Use Tax: If you reported a lower purchase price to the DMV than the actual price and consequently underpaid use tax, you can make an additional payment using the CDTFA’s online services. Choose “File a Return or Claim an Exemption for a Vehicle, Vessel, Aircraft, or Mobile Home” under Limited Access Functions to rectify the underpayment.
Promptly addressing any tax discrepancies ensures compliance and can help you receive a refund if you overpaid.
Use Tax Implications for Lease Buyouts
Purchasing a vehicle at the end of a lease agreement, known as a lease buyout, is also subject to use tax in California.
If a vehicle dealer isn’t involved in processing your lease buyout, the bank or leasing company might not collect sales tax on the sale of the leased vehicle (the buyout amount). In this case, you, as the buyer, are responsible for paying the use tax directly to the DMV when you register the vehicle.
However, a specific exception exists for 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 lease buyout is considered a sale for resale and is not subject to tax. However, if you use the vehicle personally before reselling, or if you gift the vehicle instead of reselling, use tax will be due.
Understanding these nuances of lease buyouts is essential for accurate tax compliance.
Claiming Exemptions or Exclusions from California Use Tax
California law provides various exemptions and exclusions from vehicle use tax, depending on specific circumstances. If you believe your vehicle purchase qualifies for an exemption, the DMV might require you to obtain a use tax clearance certificate from the CDTFA before registering the vehicle without paying tax.
To apply for a use tax clearance certificate (CDTFA-111), you can use 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 the CDTFA. You can mail, fax, or submit this form to your local CDTFA field office or the Consumer Use Tax Section in Sacramento.
For direct submission to the Consumer Use Tax Section, mail to:
Consumer Use Tax Section, MIC: 37
California Department of Tax & Fee Administration
PO Box 942879
Sacramento, CA 94279-0037
In some situations, the DMV might not collect use tax at registration if you declare the vehicle was a gift or a family transaction. However, the CDTFA might contact you later to request supporting documentation to verify your claim.
For detailed information on obtaining a use tax clearance, refer to publication 52, Vehicles and Vessels: Use Tax.
Let’s explore some common exemptions and exclusions in more detail:
Gifts of Vehicles
If you receive a vehicle as a gift, you are exempt from paying use tax. To qualify as a gift, the vehicle must be given freely, with no payment or exchange of value from the recipient. A vehicle is not considered a gift if:
- You pay cash, trade property, provide services, or assume a liability in exchange for the vehicle.
- Your employer gives you the vehicle as compensation (e.g., a bonus).
To support a gift exemption claim, you’ll need a signed statement from the former owner stating the vehicle was a gift, along with a copy of the vehicle’s certificate of title. The statement should include the vehicle’s VIN or license plate number.
Family Transactions
Purchasing a vehicle from a qualifying family member who is not in the business of selling vehicles is also exempt from use tax. Qualifying family members include:
- Parent
- Grandparent
- Child
- Grandchild
- Spouse or registered domestic partner
- Brother or sister (related by blood or adoption), if the sale occurs when both are minors.
Note: This exemption does not extend to stepparents or stepchildren unless a natural parent or child is involved or there is legal adoption. Transactions between ex-spouses after divorce are also not exempt.
For example, a purchase from your biological child is exempt, but a purchase from your stepchild generally is not. To claim this exemption, you’ll need documentation proving the family relationship (birth certificates, marriage license, adoption papers) and a copy of the vehicle’s certificate of title.
Involuntary Transfers
If you acquire a vehicle through an involuntary transfer of ownership, you are exempt from use tax. An involuntary transfer occurs due to circumstances beyond your control, such as:
- Court order
- Property settlement in a divorce
- Inheritance from an estate
- Repossession of a vehicle you sold
Documentation needed to support this exemption includes official court property settlement documents or a certificate of repossession, including the vehicle’s VIN or license plate number, and a copy of the vehicle’s certificate of title.
Military Personnel Exemptions
Active duty military service members transferred to California on official orders may be exempt from use tax on a vehicle brought into the state. To qualify:
- You must have purchased and taken delivery of the vehicle outside of California.
- This purchase and delivery must have occurred before you received orders to transfer to California.
Use tax will apply if you take delivery of the vehicle in California or purchase it for use in California after receiving your transfer orders. Required documentation includes official military transfer orders, a copy of your purchase contract, and a copy of the vehicle’s certificate of title.
Vehicles Not Purchased for Use in California
If you purchase a vehicle for use primarily outside of California, your purchase might not be subject to use tax. However, if a vehicle purchased out of state is brought into California within 12 months of purchase, it is presumed to be purchased for use in California and is subject to use tax under certain conditions:
- The vehicle is purchased by a California resident.
- The vehicle is registered with the California DMV within the first 12 months of ownership.
- If purchased by a nonresident, the vehicle is used or stored in California more than half the time in the first 12 months.
“Functional use” refers to using the vehicle for its intended purpose (e.g., driving for personal vehicles). To overcome the presumption of California use for vehicles entering within 12 months, you need to provide documentation like a purchase contract, seller statement verifying out-of-state delivery, out-of-state registration proof, insurance documents, tax payment evidence to another state, and records showing out-of-state use (receipts, statements).
An exception exists for vehicles brought into California within 12 months solely for warranty or repair service, if the stay is 30 days or less, including travel to and from the repair facility.
Interstate or Foreign Commerce Exemption
Purchasing a vehicle for use in interstate or foreign commerce may also be exempt from use tax. To qualify, you must prove:
- Delivery was taken outside of California.
- The vehicle was first functionally used outside of California (hauling cargo for commercial trucks).
- At least half the vehicle’s mileage in the six months after entering California must be commercial miles in interstate or foreign commerce.
Documentation needed includes a purchase contract, seller statement of out-of-state delivery, load confirmation or bill of lading for initial out-of-state use, and records verifying vehicle location and use (bills of lading, driver logs, fuel receipts) for the relevant periods. Motor carriers using electronic logging devices should retain these records for at least eight years for potential CDTFA audits.
For trucks or trailers purchased without DMV registration and use tax payment, you still need to report the purchase to the CDTFA and file form CDTFA-401-CUTS, Combined State and Local Consumer Use Tax Return for Vehicle.
Expanded Exemption for Trucks and Trailers in Interstate Commerce (AB 321)
Assembly Bill 321 expanded the sales and use tax exemption for trailers and semitrailers to include certain new, used, or remanufactured trucks used exclusively out-of-state or in interstate/foreign commerce. This exemption is operative from January 1, 2020, through December 31, 2023. For details, see Special Notice, Assembly Bill 321 Expands Sales and Use Tax Exemption to Include Trucks Used Out-of-State or in Interstate or Foreign Commerce.
Purchases by American Indians for Reservation Use
American Indians residing on a reservation may qualify for a use tax exemption if:
- Vehicle ownership transferred on the reservation.
- Vehicle delivery occurred on the reservation.
- The vehicle is used on the reservation more than half the time in the first 12 months.
Required documentation includes a purchase invoice showing title transfer and delivery location/date, vehicle certificate of title, and proof of American Indian residency on a reservation (Tribal Council letter, tribal ID, U.S. Department of the Interior letter).
Partial Exemption for Farm Equipment
A partial use tax exemption is available for vehicles used exclusively in producing and harvesting agricultural products. This exemption applies only to the state general and fiscal recovery funds portion of the sales and use tax (currently 5.00%).
To calculate the tax rate for qualifying purchases, subtract 5.00% from the standard tax rate for your registration location. For example, if the standard rate is 9%, the rate for qualifying farm equipment would be 4.00%. (Note: State tax rates are subject to change).
To qualify, the vehicle must be:
- Purchased for use by a qualified person.
- Used 100% of the time in agricultural production and harvesting.
- Qualify as farm equipment and machinery (designated as an implement of husbandry under the California Vehicle Code; see Appendix A to Regulation 1533.1, Farm Equipment and Machinery,).
Generally, passenger cars and trucks designed for public roads are not considered implements of husbandry. Documentation needed includes your most recent federal or state income tax return with Schedule F (Profit or Loss from Farming), DMV registration or ID slip classifying the vehicle as an implement of husbandry, bill of sale/purchase contract, and vehicle certificate of title. Refer to Regulation 1533.1, Farm Equipment and Machinery and publication 66, Agricultural Industry for more details.
Purchases for Use Solely Outside of California
You might be excluded from California use tax if your only vehicle use in California is to remove it from the state, it will be used solely outside California thereafter, and you do not register it in California with the DMV. This exclusion applies to purchases that would otherwise be subject to use tax, not purchases from licensed vehicle dealers subject to sales tax. For example, buying from a private party in California. A One-Trip Permit from the DMV may be used instead of registration for such situations.
Use Tax Verification for Other States
If you move out of California and need to register your vehicle in another state, you may be asked for verification of California tax payment. The CDTFA can provide this verification. To request it, use CDTFA’s online services and select “Verify a Sales and Use Tax Payment”.
Conclusion
Navigating sales tax on a vehicle in California – or more accurately, use tax – can seem complex. However, by understanding when use tax applies, how it’s calculated, and the available exemptions and exclusions, you can ensure you are compliant with California tax laws. Always refer to the official resources provided by the California Department of Tax and Fee Administration (CDTFA) and the DMV for the most up-to-date information and specific guidance related to your vehicle purchase. Utilizing the CDTFA’s online services and carefully reviewing publications and forms will streamline the process and help you confidently manage your vehicle tax obligations in California.
