The Washington State Luxury Sales Tax on Cars
- Avantia
- 10 hours ago
- 5 min read
At Avantia and BDO, we seek to be highly tax aware advisors for our clients. Many of our clients are asking for help in navigating the new taxes that go into effect on January 1st, 2026.
The Luxury Sales Tax on Automobiles
The major changes to the purchase of an automobile effective January 1, 2026 are as follows:
Increase to the additional motor vehicle sales tax of 0.2% which applies on the full purchase price of the car.
A “luxury vehicle” additional sales tax of 8%. This is on the amount the purchase price of the car exceeds $100,000 (this amount increases by 2% each July 1). This tax does not allow an offset for a trade in.
Don’t forget the car is still subject to the general sales tax. Note: Due to separate local legislation, the general sales tax in King County is increasing by 0.1% and in the City of Seattle by an additional 0.1%.
Example
Let’s look at a simple example of how this tax would apply if you were in Seattle. Effective 1/1/2026 the sales tax will be 11.050%:
January 1, 2026 | December 31, 2025 | |
State Sales Tax | 6.50% | 6.50% |
Local Sales Tax (Seattle) | 4.05% | 3.85% |
Additional Motor Vehicle Sales Tax | 0.50% | 0.30% |
Total Combined Sales Tax Rate | 11.05% | 10.65% |
Trade in credit allowed for Sales Tax
Luxury Tax (Price greater $100k) | 8% | N/A |
Trade in credit NOT allowed for Luxury Tax
If we purchase a $700,000 car for cash, the total tax will be:
Sales tax on $700,000 $77,350
Luxury sales tax on $600,000 $48,000
Total Sales tax $125,350
If the same car was purchased on 12/31/2025, the sale tax would have been $74,550 (no luxury tax, 0.2% lower local sales tax, 0.2% lower additional motor vehicle sales tax). Thus, the incremental cost of purchasing the car under the new laws is $50,800.
Planning Options
A common question we hear from clients is how can they not be subject to this new tax. Let’s walk through some thoughts on approaches that could be taken.
Become a non-Resident of Washington and purchase and use your cars outside of Washington.
This is by far the easiest and safest approach . That being said, many of our clients have close ties to the communities that they do not want to sever. This generally involves moving to another state and changing your doctors, social clubs, and estate planning documents. It also involves spending fewer days in the state of Washington for several years.
The above actions are not all inclusive. Relinquishing a Washington “domicile” is very fact specific and we recommend that it be done with intention and documentation. If this is an approach you wish to pursue, we are happy to schedule a meeting with you.
Pay the tax and treat it as a cost of living in Washington.
This is the simplest approach . The best way to think about taxes are that they are the cost of living in a certain area. This ultimately becomes a personal value decision. Is it worth it to pay this tax to live in Washington?
Purchase the car outside of Washington and don’t bring it into Washington.
This would subject the car to the applicable sales tax in the jurisdiction that you purchased the car in. Obviously, the biggest challenge with this approach is that you don’t get to enjoy the use of the car within the state of Washington.
A note about Montana LLC’s
One of the things that you “hear” about is the fact that you can set up an LLC in Montana and purchase the car through the LLC. For Montana purposes, an LLC’s residency is determined based upon where it was formed. Thus, the LLC as a Montana Resident can register the car in Montana. Since most areas of Montana have no sales tax, this would not attract sales tax in Montana. There are a number of companies that will handle all of this for their clients.
A WORD OF CAUTION! For state sales tax purposes, other states are not required to follow Montana’s rules for purposes of applying their sales or use tax to a car that was purchased out of state. The below link involves a recent situation in Tennessee where the owner is being pursued for tax evasion by the state. Several states including Washington are increasing enforcement on this type of transaction targeting vehicles with out of state plates.
The state of Washington has a use tax that is parallel to the sales tax and luxury tax systems. Its purpose is to ensure that if items are purchased without sales tax the state of Washington still gets the appropriate amount of tax on the use of the item within the state of Washington.
Washington isn’t bound by Montana domestic law to determine whether the car is subject to sales/use tax. Washington has specific rules that are designed to catch individuals that use entities outside of the state to avoid paying Washington sales/use tax. These rules generally assess Washington sales/use tax on the first use of tangible personal property in the state.
We would NOT recommend any of our clients utilize the Montana LLC planning idea to avoid Washington State sales, use, or luxury tax.
Used Car Dealership
Property purchased for resale generally is not subject to sales tax. For individuals that meet certain criteria, it might make sense to set up a used car dealership and then hold their car collection in their used car dealership.
This approach would only work with someone who is generally purchasing and selling cars on a regular basis. Selling a car a year or once every few years would not be enough. This would require a profit motive and activities consistent with what a car dealer normally performs. Your use of the cars would be limited to what is typically allowed by car dealerships. Any intervening use other than as inventory would subject the car to use tax.
This approach would also change the taxation of the gain on the sale of cars as they would be considered inventory and would not be considered capital assets subject to capital gain or collectible tax rates. The gains would be taxed at ordinary income tax rates.
The tax issues associated with this approach are complex and you should consult with your tax advisor before proceeding with this structure.
If you would like to discuss the above options to determine if any of them are appropriate for you, we would be happy to schedule a meeting.
Authors:
Pat Riley, Avantia
Andrew Stuard, BDO PC
Disclaimers:
This article provides general information and should not be considered legal, tax, or financial advice. Consult with a professional for personalized recommendations. https://www.avantiamfo.com/disclosures