Insider Car Buying Tips: When the bottom line isn’t the bottom line
You’re happy with the price negotiated for that new car or truck. You did your homework ahead of time and negotiated a great deal based on the sticker price, dealer invoice and incentives. But when the bill of sale arrived, you’re shocked at the total price. The bottom line is thousands more than you expected. What happened?
“When buying a car, not only understand the value of the vehicle, understand what will be the other charges that go along with it,” advises David Bennett, manager of repair systems for AAA. “What are the taxes, title fees, documentation fees, those are things that an educated consumers need be aware of” before they walk into a showroom.
Recurring personal property taxes
Of concern in terms of affordability is whether the state or county in which the vehicle is purchased collects an annual personal property tax. That tariff runs into hundreds of dollars each year for older vehicles, but for newer models over $1,500 annually is a real possibility when the keys to the new ride are accepted. The tax is based on the vehicle’s value.
For example, the statewide sales tax in Virginia is 4.3 percent, everyone pays that tax when a car or truck is purchased. However, residents living in Fairfax County, Virginia, which borders Washington, D.C., also are required to pay a personal property tax based on the value of their car and truck, as well as their recreational vehicle and boat. The tax is collected each year and ends when the car, truck, etc., is sold or the owner moves out of state.
The current personal property rate in Fairfax County is $4.57 per $100 of assessed value. For a new car, the levy is based on the manufacturer’s suggested retail price. For example, the personal property tax on a new 2018 Chevrolet Corvette with a $100,000 sticker price is $4,570. The personal property tax on a new $30,000 2018 Nissan Rogue is $1,371. The tax is for a 12-month period.
The personal property tax is collected annually in one lump sum for as long as the vehicle is owned. It’s one thing to be able to purchase a vehicle, but can the buyer really afford to pay the monthly car payments, insurance, annual vehicle registration and the annual personal property tax? Maybe not.
The tax declines each year as the vehicle depreciates. The tax is based on the value of the car each January 1. The county uses the National Automobile Dealers Association’s used vehicle price guide to determine the value. The bottom line is the tax is serious money for some car buyers who might be better off buying a used car that costs considerably less and taxed at a lower rate. These personal property tax bills are sent out in the summer.
Also, there is no escaping the tax if the car is leased.
“If you are leasing a car from Nissan Motor Credit, for example, (Nissan) will get the (tax) bill and they will add what they paid to your next month’s payment,” said Juan Rengel, director of the Personal Property and Business License Division, Fairfax County (Virginia) Department of Tax Administration. For example, if a person is leasing a Rogue that carries a $30,000 sticker price and paying $275 a month, sometime in the summer that person will be required to pay the credit company $275 (the monthly payment) plus the $1,371 property tax, a total of $1,646.
Check documentation fees
Another cost that cannot be avoided is the documentation fee, sometimes simply called the “doc fee” or “processing fee.” It is a line item on the bill of sale. But, buyer beware. The fee covers the dealer costs in processing a vehicle purchase, such as registering the new vehicle, title transfer for the used vehicle if there is a trade-in, possibly the purchase of new license plates, and a portion of the cost to pay the personnel who handle those documents. The license plates may be a separate line item.
A few states cap that fee. In Illinois, for example, the documentation fee is capped at $176. Michigan is $210. But in many other states, such as Florida, there is no cap on what the dealer charges.
“We are down here in Florida. It is Looney Tunes. Oh my god, down here I have seen doc fees go from $200 up to $2,000. Florida is a complete zoo,” said one dealer who asked not to be identified. “You can call it anything you want. When it is that high, basically it’s money for the dealership.”
Generally, a dealership will refuse to reduce the document fee, fearful that it will be sued for having inconsistent document fee costs. However, the buyer should renegotiate a lower price for the car or truck to compensate for extremely high documentation fees.
“They can sell the car at a $500 loss, but they are giving you a $1,500, $2,000 doc fee. It is still bottom line, and you and I know what that means,” the dealer added.
Don’t forget the sales tax
Then there’s sales tax. A consumer can’t avoid it or shop around for a state, county or city with the lowest sales tax to buy a car or truck. The sales tax is based on where the consumer resides.
Forty-five states collect statewide sales taxes; the District of Columbia also collects a sales tax. Oregon does not have a statewide sales tax; however, it enacted a 0.5 percent privilege tax on new vehicle purchases effective January 1 this year. Alaska, Delaware, Montana and New Hampshire do not have a sales tax; however, Alaska and Montana allow local municipalities to levy the charge.
California has the highest statewide sales tax, 7.25 percent, according to the Tax Foundation. Four states tie for the highest second place rate, 7 percent: Indiana, Mississippi, Rhode Island and Tennessee. Nationwide, some states tax the incentives on a new vehicle, some don’t.
Of course, many municipalities add local sales taxes. For example, the statewide sales tax in Illinois is 6.25 percent. However, buying a car in Chicago is costlier. Added are a city of Chicago sales tax, 1.25 percent; Cook County tax, 1.75 percent; 1 percent special tax, for a city sales tax total of 10.25 percent.
“The other thing to consider is there are some states that do a net cost on the sales tax, meaning if the vehicle cost $20,000 and you are trading in a vehicle, let’s say they are going to give $5,000, the sales tax is based on the $15,000 transaction. But it does vary by state,” Bennett said. Other states will tax at the $20,000 level.
Conclusion: Taxes you can’t control, but the documentation fee could be the thorn that spoils the deal. It’s your money so walk away and try another dealer if the doc fee seems way too high.