Many states allow some form of sales tax credit if you trade in your used car for a new one. Arizona is one state that allows a trade-in tax credit. The dollar amount of the sales tax reduction you receive due to your trade depends on the location of the car dealer from which you buy the new car and how much you get for your trade-in.
Arizona Net Sales Tax
If you buy a new car from a dealer in Arizona and plan to register the car in the state, you will be charged sales tax on the amount equal to the price of the new car minus the trade-in value of your old car. For example, if you buy a new car for $25,000 and get $7,000 for your trade-in, you will pay the sales tax rate on $18,000. The "new" car can be a brand-new car or a previously owned car you are buying from the dealership.
Tax Rate of Dealership
Arizona officially refers to a sales tax as a Transaction Privilege Tax, or TPT. The law states a business is responsible for paying the tax but is allowed to collect it from customers. Arizona car dealers collect the sales tax at the tax rate set by the city and county where they are located. This is in contrast to some states where the tax rate is based on the rate in effect for the residence of the car buyer.
Arizona Tax Rates
Arizona as of publication has a statewide sales tax rate of 6.6 percent, and the separate county and city rates are added to the state tax rate. The total local sales tax rate ranges from approximately 9 to 10 percent for most towns and cities in the state. For the city of Phoenix the sales tax rate is 9.3 percent and in Tucson the rate is 9.1 percent. The town of Fredonia in Coconino County has the highest sales tax rate at 11.725 percent.
Increased Trade In Value
The fact that the value of your trade-in reduces the amount of sales tax you must pay can be viewed as additional value for your trade. If the dealer will give you $10,000 for your trade, you would have to sell the car on your own for $10,900 — at a 9 percent tax rate — to equal the value of the trade and the sales tax savings. Keep the tax savings in mind if you attempt to sell your car yourself instead of trading in for another vehicle.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.