What is luxury tax on cars?

By definition, luxury cars are expensive to buy and own.

Luxury Car sportscar from my luxury car series image by alma_sacra from Fotolia.com

Buying a new car is a complex and often expensive process. The type of car you select determines not only how much you pay for the vehicle, but also what taxes you pay and how much the car costs to maintain and drive. However, drivers in the United States no longer need to worry about the luxury car tax, which was an added cost for some vehicles in the past.

Former Luxury Car Tax

The luxury car tax was a federal tax imposed on cars with prices above a certain level between 1990 and 2002. Despite its name, the luxury car tax applied to all cars that were eligible because of price, including expensive sports cars and more traditionally "luxurious" vehicles designed for comfort and prestige. The luxury car tax did not apply to trucks or SUVs, regardless of their prices. The luxury car tax expired in 2002 and, as of 2012, has not been renewed or reestablished.

Luxury Car Tax Rates

When the luxury car tax went into law in 1990, it imposed a 10 percent tax rate on the price of a new car with a suggested retail price above $30, 000. This means that only $15, 000 of a $45, 000 car was subject to the tax. Luxury car tax was a flat rate tax, paid to the federal government in addition to regular sales taxes that all new car buyers paid. Between 1990 and 2002, the minimum price for a car to be classified as luxury rose from $30, 000 to $40, 000, and the tax rate fell from 10 percent to 4 percent.

Paying Taxes on a Car

When the luxury car tax was in effect, automakers often paid the luxury car tax themselves before placing a car up for sale. They would then add the tax amount to the advertised price of the new car. New car buyers were still responsible for paying local and state sales taxes on the full price of new cars, at local rates. Auto dealers collect state and local taxes, just as other retailers do, at the time of the sale or within the value of a car loan.