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Why do I have to pay sales tax on a used car?

For many people in California, as well as across the nation, purchasing a new car every time their old one breaks down simply isn't something their budgets will allow. It's because of this fact that many people choose instead to purchase used cars that oftentimes come with a more budget-friendly price tag.

For those who have purchased a used car, you may have noticed that the price you are purchasing the vehicle for oftentimes differs from what you actually pay though. This is due in part to sales tax that is typically added to the price tag. Now, you may be thinking, "The vehicle was already taxed when it was first made, why am I paying sales tax again?" Here’s the answer:

The sales tax applied to all goods and services is known as a consumption tax, which taxes an individual for spending their money on a good or service. In the example of a used car sale and purchase, each new owner is spending their money to purchase it, meaning it is being "consumed" each time. Each time a new owner spends money on the vehicle, sales tax is applied. In the end, the amount of sales tax paid over time can total more than the value of the vehicle.

For people preparing their estate plan, consumption tax can create problems because an individual may not realize that selling their newer car in exchange for a cheaper used car will actually incur more costs. As you can imagine, this may be one reason why some people choose to gift their car to someone else or straight up sell it in order to avoid paying further sales tax on another vehicle.

Sources: How Stuff Works, "How to Figure Out the Cost of Taxes on Your Car," Kristen Hall-Geisler, Accessed Oct. 2, 2015

The Library of Economics and Liberty, "Consumption Tax," Al Ehrbar, Accessed Oct. 2, 2015

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