Guide Guide to Motor Vehicle Sales and Use Tax

Massachusetts has a sales and use tax on buying or transferring motor vehicles. This guide provides general information about Massachusetts tax laws and Department of Revenue policies and procedures. It is not designed to address all questions which may arise nor to address complex issues in detail. Nothing contained herein supersedes, alters or otherwise changes any provision of the Massachusetts General Laws, Massachusetts Department of Revenue Regulations, Department rulings or any other sources of the law.

General Rules

6.25% sales or use tax

If you're a buyer, transferee, or user, who has title to or has a motor vehicle, you're responsible for paying the sales or use tax.

The sales tax applies to transfers of title or possession through retail sales by Massachusetts dealers or lessors while doing business. If the sale is made by a motor vehicle dealer or lessor who is registered with DOR, the sales tax rate is 6.25%.

The use tax applies to all other types of transfers of title or possession where the vehicle transferred is stored, used, or consumed in Massachusetts. If the motor vehicle is casually sold (not sold by a dealer or lessor), the use tax rate is 6.25% of the greater of:

  • The actual amount paid for the vehicle, or
  • The vehicle's clean trade-in value (book value)

Every buyer who is required to register or title the vehicle in Massachusetts, must file Form RMV-1, Application for Title and Registration within 10 days of buying, transferring, or using the vehicle within Massachusetts and pay any applicable tax to the RMV.

Every buyer who is not required to register or title the vehicle in Massachusetts, must file a completed Form ST-7R, Motor Vehicle Certificate of Payment of Sales or Use Tax by the 20th day of the month after the buying, transferring, or using the vehicle, and pay any applicable tax to DOR or the RMV.

If the sales/use tax is not paid on time, the buyer will have to pay interest and penalties.

Key Actions for General Rules

Additional Resources for General Rules

Book Value

The amount taxed on casual sales (non-dealer sales) is based on the higher of:

  • The actual amount paid for the vehicle, or
  • The clean trade-in value of the vehicle adjusted by either the high mileage adjustment (decreases value) or the low mileage adjustment (increases value)

The Registry of Motor Vehicles (RMV) properly adjusts for mileage at the time of registration. Value adjustments based on the mechanical or structural condition of the motor vehicle are not considered under current sales/use tax law. For example, if the car engine or doors need replacing, the vehicle's book value will not be adjusted.

Salvage vehicles

An exception to the above rule is a salvage vehicle. A salvage vehicle is any vehicle that an insurance company:

  • Has deemed to be a total loss due to fire, theft, collision, flood, or similar event, and
  • Has issued a title stamped or labeled "salvage" by the RMV

If the RMV has titled a motor vehicle titled to the seller as a "salvage vehicle," the sales/use tax is based on on the actual amount the buyer paid.

Exemptions

Exemptions from the motor vehicle sales and use tax are:

  • Family transfers
  • Gifts
  • Out-of-state buyers
  • Sales to an exempt organization
  • Transfers to or from a business entity
  • Transfers to a disabled person

Family transfers

As long as the transferor paid any Massachusetts sales or use tax before,  casually selling or transferring a motor vehicle or trailer to a:

  • Parent
  • Spouse
  • Child, or
  • Sibling

Is exempt from the tax. A vehicle owned jointly by a married couple may be treated as owned by either.

Gifts

As long as the donor paid any Massachusetts sales or use tax before, transferring the complete ownership of a motor vehicle, trailer, or other vehicle by a donor to a recipient (and intended on the donor's part as a gift) is tax-exempt.

For this exemption to apply, all of the following must be true:

  1. Neither party made or received payment (related to the transfer) in any form
  2. Neither party promised payment for the vehicle, and neither party expects payment in the future
  3. Neither party assumed any debt related to the transfer, and
  4. At the time of the transfer, the donor intended to make a gift of the vehicle to the recipient

Out-of-state buyers

Generally, buying a motor vehicle or trailer outside Massachusetts that is later brought to or used in Massachusetts is tax-exempt if all of the following requirements are met:

  1. The vehicle's buyer paid a sales tax to the state or territory they bought it in
  2. This tax was legally due to that state or territory
  3. The vehicle's buyer has not received and has no right to receive a tax refund from the state or territory they bought it in, and
  4. The state the tax was paid to allows a corresponding exemption for motor vehicle sales tax paid to Massachusetts

However, if the motor vehicle or trailer was bought outside Massachusetts and brought into Massachusetts within 6 months of the purchase date, 1 of the following scenarios applies:

  1. The buyer doesn't have to pay Massachusetts use tax:
    • If the state or territory it was bought in has a reciprocal agreement with Massachusetts (allows a corresponding exemption/credit for sales/use taxes paid to Massachusetts), and
    • The rate of tax paid to that state or territory is greater than or equal to the Massachusetts use tax rate.
  2. The buyer must pay part of the Massachusetts use tax:
    • If the state or territory it was bought in allows a corresponding exemption/credit for sales/use taxes paid to Massachusetts and the rate of tax paid to that state or territory is less than the Massachusetts use tax rate.
    • The use tax is calculated by taking the difference between the Massachusetts use tax rate (6.25%) and the other state's tax rate, and multiplying that difference by the sales price.
  3. The buyer must pay the full Massachusetts use tax:
    • If the state or territory it was bought in does not allow a corresponding exemption/credit for sales/use taxes paid to Massachusetts.

Sales to an exempt organization

Selling or transferring a motor vehicle, trailer, or other vehicle to any 501(c)(3) organization (under I.R.C. § 501(c)(3)) is exempt from the sales and use tax, but only if:

  • The vehicle is bought by or transferred to the organization
  • The vehicle is registered in the organization's name, and
  • The vehicle is used directly and exclusively for the organization's purposes
  • The Organization holds a valid certificate of exemption (Form ST-2)

Transfers to or from a business entity

Selling or transferring a motor vehicle, trailer, or other vehicle to or from a business entity is usually taxable. However, the sale or transfer is tax-exempt as long as the transferor paid Massachusetts sales or use tax before, and the sale or transfer is:

  • A transaction that qualifies as a "reorganization" (within the meaning of I.R.C. s. 368(a)(1))
  • For forming a partnership or corporate trust, or for organizing a corporation, solely in exchange for ownership interest in the enterprise, or
  • To an owner of a business entity solely in exchange for the owner's interest on completely closing a partnership or corporate trust, or on the complete liquidation of a corporation

Additionally, the transfer must be completed within 90 days, and the recipient must claim the exemption.

Transfers to a disabled person

Selling or transferring a motor vehicle to and for the use of anyone who has suffered the loss or permanent loss of use of:

  • Both legs
  • Both arms, or
  • 1 leg and 1 arm

Is exempt from the sales and use tax. For this exemption's purposes, loss of use means losing at least 80% of function.

A vehicle that is jointly owned by a couple may be treated as owned by either one. This exemption applies to a single registered motor vehicle purchased for personal (non-commercial) use.

Additional Resources for Exemptions

Nonresidents Buying Motor Vehicles in Massachusetts

If a nonresident of Massachusetts buys a motor vehicle in Massachusetts and takes title to and/or possession of the vehicle in Massachusetts, the sale is subject to the Massachusetts sales/use tax, regardless of whether the nonresident intends to use the motor vehicle in or outside of Massachusetts.

Rebates

If a motor vehicle dealer sells a motor vehicle to a customer who applies a manufacturer's rebate to reduce the sales price at the time of the sale, the rebate is treated as a cash discount and excluded from the sales price subject to tax.

However, if a motor vehicle dealer sells a motor vehicle to a customer who will receive a rebate after the sale, the sales tax is based on the full purchase price. Upon receiving the rebate, the customer is not entitled to tax refunds originally paid on the rebate amount.

Additional Resources for Rebates

Rescission of Sale

A rescission of sale is a cancelled sale. You're entitled to a refund of the sales/use tax you paid if you're a buyer who:

  • Returns a motor vehicle to the seller within 180 days from the date of sale, and
  • Receives the full consideration paid, minus the seller's pre-established handling fees

To claim this refund, file and submit to the DOR, all together:

  • An abatement
  • A properly completed and signed Form MV-AB2, Affidavit - Rescission of Sale of a Motor Vehicle
  • A copy of the registration certificate showing the amount of tax you paid to the RMV.

A buyer of a motor vehicle, trailer, or other vehicle who wants to dispute the amount of tax or interest and penalties assessed must file an abatement/amended return.

A "lemon law" refund from a vehicle manufacturer does not count as a cancelled sale ("rescission" of sale) between a vendor and a retail customer. An abatement of tax is not allowed on these transactions. When the retail customer is given a "lemon law" refund by the manufacturer, the manufacturer must also reimburse the retail consumer for "incidental costs including sales tax, registration fee, finance charges and any cost of options added by an authorized dealer."

Trade-in Credit

If a motor vehicle or trailer is traded-in or exchanged for another motor vehicle or trailer, the tax is computed as follows:

Sales by Massachusetts dealers/lessors

If the sale is done as part of doing business, and the buyer either:

  • Paid a tax on the vehicle traded-in, or
  • Is exempt from tax on the vehicle traded-in

The sales tax is based on the sales price minus the trade-in amount.

Sales by out-of-state dealers/lessors

A trade-in credit can only reduce the taxable sales price when all of the following criteria are met:

  1. The buyer either:
    • Previously paid a tax on the vehicle traded-in, or
    • Is exempt from tax on the vehicle traded-in.
  2. The dealer/lessor is registered with the Massachusetts Department of Revenue, or the dealer's/lessor's state or territory imposes a tax on nonresidents.
  3. That state or territory is reciprocal with Massachusetts, and
  4. That state or territory allows a trade-in credit as a reduction to the taxable sales price.

Casual and isolated sales

No reduction in taxable sales price is allowed as a result of a trade-in.

Documentation to Submit with Abatement/Amended Tax Return

  • Copy of Bill of Sale
  • Copy of registration certificate showing the amount of tax you paid to the RMV
  • If applicable:
    • Tax exemptions - Related affidavit or exemption certificate form
    • Challenges to the book value used by the RMV - Odometer reading at time of purchase
    • Penalty assessment - An explanation detailing the reasonable cause for the late filing and tax payment. The assessment of interest is not discretionary and the Department of Revenue does not have the authority to abate interest accrued on unpaid or late paid tax.
    • Cancelled sales ("rescissions of sale") - A completed and signed Form MV-AB2, Rescission of Sale of a Motor Vehicle Affidavit

Key Actions for Documentation to Submit with Abatement/Amended Tax Return

Image credits:  Driving in Back Bay (Shutterstock)

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