How are Car Sales Taxed in Texas?
Are you thinking about buying or selling a car in Texas? You might want to acquaint yourself with Texas car sales tax rules.
Car sales represent the second largest purchase made by individuals throughout Texas. You'd be sadly mistaken if you think big government doesn't want a piece of that pie.
Given the monetary size of the transaction, car sales in the state often result in a significant tax bill, one that you likely want to be aware of before making a purchase.
What are Texas Car Taxes Based On?
Much of the confusion surrounding car sales taxes in Texas stems from the amount of tax you can expect to pay, which will vary (sometimes significantly) depending on the county and city you live in.
Sales and Use Tax Rates in Texas
Texas imposes several types of motor vehicle taxes on its motorists. Below, we break down the taxes that were calculated for you.
Texas Sales Tax
This is a big one. As the Texas Department of Motor Vehicles states, any individual who purchases a vehicle within the state's borders owes sales tax on that purchase.
The current state tax for cars (subject to change) sits at 6.25%, imposed on the final sales price of the vehicle.
This tax is due to your local county's tax assessor (or collector's) office. It can be made payable by sending Form 130-U (Application for Texas Title and/or Registration).
More information on this process can be found on the Texas Comptroller's Website.
Texas Use Tax
The Texas Comptroller requires both new and established Texas residents to pay a 'use tax' imposed on the total sales tax for the vehicle transaction.
A 6.25% tax is paid instead of sales tax when an out of state vehicle is brought into Texas.
New Resident Tax
A new resident tax is owed to those who have brought a car to Texas from another state (or country). This fee is made in place of the use tax, and the price is currently; $90.
Note: The vehicle must have been previously registered in the new residents name prior to moving to Texas to qualify for this.
DMV Fees In Texas: An Added Cost
Although not necessarily a tax, Texas DMV fees are often an overlooked expense related to Texas car sales, a big mistake, given that they add up fast.
On average, the total fees one can expect to pay the DMV in Texas for a new car purchase is around $850.
This total includes:
License plate fees
Title and registration
Dealership Fees
Dealership document fees are regulated by the State of Texas by the Office of Consumer Credit Commissioner (OCCCC).
The maximum amount that can be charged is $225 unless the dealer provides proof of higher costs.
TIP
As we go through this guide on the expenses of buying a car, we'd be remiss if we didn't talk about auto insurance in Houston, Texas.
Not only does the state of Texas Department of Motor Vehicles require a mandatory minimum amount of coverage, but budgeting for the right coverage can also ensure that you, your passengers, and your family are financially covered in an accident.
Calculating Sales Tax: Standard Presumptive Models
If you purchased your car from a private party and not a dealer, you'll have to do some math to calculate your sales tax rate. Unfortunately, it's not as easy as multiplying 6.25% by the final sales price.
Known as Standard Presumptive Value (SPV), this figure is what the Texas Department of Motor Vehicles uses to estimate the vehicle's worth based on similar sales made in the state.
Luckily, the state does make this easier by providing an SPV calculator on the Department of Motor Vehicle's website.
All you'll need to enter is the VIN (vehicle identification number) and the odometer reading at the time of sale.
But What if You Paid LESS Than the Standard Presumptive Value?
In such cases, you would be qualified to pay a lower price. Suppose you paid less than the SPV for the vehicle. In that case, your sales tax on the transaction can optionally be calculated based on a certified appraisal amount for the car.
TIP: This appraisal must be conducted by a licensed insurance adjuster or motor vehicle dealer within 30 days of the purchase.
What Types of Vehicles Aren't Subject to the Standard Presumptive Model?
Those vehicles which were part of a trade or 'swap' for another vehicle of equal value are subject to a $5 tax.
Any motor vehicle that is given as a gift is subject to a $10 tax.
Any vehicle sold by a mechanic or storage facility
Transactions on a salvage or an abandoned vehicle
Any off-road vehicle, including dirt bikes and ATVs
Any vehicle that is 25 or more years old
Any vehicle purchased as part of a governmental auction
Any vehicle purchased as part of a foreclosure
Vehicles purchased from a licensed auto dealer
Brand new vehicles
How Are Trade-ins Taxed?
Trading in your old vehicle when purchasing a new one is a common practice at dealerships, with the trade-in value being applied as a credit towards your new purchase. Luckily, in Texas, the value of your trade-in is not subject to any sales tax.
How Are Dealer Incentives and Rebates Taxed?
Dealers are well-known for using incentives and rebates as marketing tactics to draw in new buyers.
In Texas, sales tax is imposed on the transaction value AFTER any rebates or incentives have been applied. In other words, you only pay sales taxes on the final cost after the rebate and incentives.
Final Thoughts on Texas Car Sales Tax
This last year has left many people feeling the pinch. No one likes a surprise tax bill, whether you're in a better or worse position than the previous year.
Following the tips in this guide, you can adequately account for what to budget and avoid costly pitfalls, fines, and fees if you miscalculate or fail to pay the tax price.
Are you going to read more about Texas? Read our Ultimate Guide on How to Sell a Car in Texas.