Finally—you found a new car with a price that fits your budget. But don’t whip out your checkbook just yet. Every new car transaction has fees and taxes that can add a considerable amount to the total price. Does your budget account for charges beyond the MSRP?
Taxes, registration fees, and document fees are the most common additional charges to expect at a dealership. There are some sneaky charges to be aware of, too. We spoke to industry experts to learn more about new car fees and taxes to anticipate and consider how those fit into individual budgets. Think twice before you sign on the dotted line.
Are Car Sales Taxed?
Like any retail purchase, car sales are taxed. How they’re taxed depends on where you live. The rate could be as simple as your state’s sales tax, or more granular: “Tax is determined by the residence of the consumer who’s buying the car—not where they’re buying the car,” says Brian Maas, President of the California New Car Dealers Association (CNCDA). Maas points out that factors like the county, city, and regional transportation district you live in can alter the rate.
In most states you must register your car in the area where you’re a resident. Therefore, you can’t register a vehicle out of state to take advantage of a better tax rate.
Trading in your old car? That could give you a tax break. “In some states they’ll tax the difference between the new car and the trade-in,” says Michael Schwartz, vice president and CFO of Galpin Motors in Southern California. So, if you’re trading in a vehicle worth $10,000 on a $50,000 purchase, you’ll only be taxed on $40,000. Check your local listings.
What Are Registration Fees?
Registration fees are paid to your state of residence. They cover the cost of the title, which serves as legal proof of ownership of your vehicle. License plates are also included (personalized license plates are extra and are processed through the DMV, not the dealer). Registration fees vary between states. Some charge a flat fee, some base it on the vehicle’s value or weight, and some use a mix of factors.
Most states require your car to be registered at the time of purchase; dealer computers feed your info directly into the state database. Maas says You’ll pay for that convenience, though—expect a charge for electronic vehicle registration. Nonetheless, Maas thinks, “Most customers pay it for the convenience of avoiding hassles at the DMV.”
Electric vehicles sometimes have special registration fees. Scott Kaufman, founding partner at California Lemon Law Attorneys, says, “Many states have changed their formats for registration fees, because EVs don’t pay a gas tax. They have to get tax to pay for the road somewhere, so they charge a flat fee for electric cars, usually a few hundred dollars per car.”
Some states levy an additional registration fee on heavy vehicles. These weight fees apply primarily to large trucks or commercial vehicles. The rationale is that since these vehicles weigh more, they have a greater impact on roads, and weight fees help mitigate those infrastructure costs.
Registration fees can total in the hundreds of dollars, or even more for expensive cars. You might not need to pay them all at once, though. According to Maas, “For most consumers that finance the purchase, all these fees and taxes can be financed, too. If you’re purchasing a vehicle over several years of financing, fees and taxes can be bundled into the payments.”
Do I Have to Pay Document Fees?
At the dealership, you can’t just plunk down cash and head home in your new whip. You’ll only get the keys after completing documents associated with the sale. Some of these documents are government mandated, others are from the dealership and relate to your specific transaction. Regardless, expect document fees (often called doc fees) when you buy or lease a car.
“Every state requires dealers to process certain documents to complete the sale, so every state allows dealers to charge for document processing,” says Maas. Doc fees vary from state to state. Maas points to a CNCDA study that found the national average is $349. He notes how “in some states, those fees are unregulated—there’s no cap. Some dealers charge $700 or $800 for document processing.” However, other states impose a maximum; in California it’s $85.
Kaufman takes a skeptical view of doc fees. Noting the huge variance between doc fees nationwide, he says, “There’s nothing done to earn those fees—dealers just charge them because they can… It’s not based on anything more than if they can squeeze you.”
Schwartz counters that claim. “The labor to prepare documents for a customer takes anywhere from an hour to two hours. We have to pay a person for that, and for the forms required for the sale. We have to buy all those forms, and the specialized computers and printers we use to prepare the documents, and those aren’t cheap.” Doc fees allow dealers to recoup those costs.
In any case, doc fees are not mandated, and they are negotiable. If a dealer tries to hit you with exorbitant document fees, you can try to talk them down—and if they won’t budge, it’s within your rights to walk away from the deal.
Are Destination Charges Negotiable?
It costs money to get a car from where it was built to a dealership lot. That’s represented in destination charges, also known as transport, delivery, or shipping fees. They are set by the manufacturer, not the dealer. Destination charges are negotiable, but since dealers must pay the factory to get the cars to their lots, that could be a hard bargain.
You’ll see destination charges listed on the window sticker, but advertisements sometimes omit those costs to imply a lower price. As such, do your research to make sure destination charges are part of the price; MotorTrend always includes destination charges in its Buying Guide.
What Is Added Dealer Markup?
How much would you pay extra for your dream car? If you’re after something cool or rare, don’t be surprised to see a dealer markup on the window sticker. Although not a fee or tax per se, it’s a charge added by the dealer to benefit from market demand.
The Honda Civic is a perfect example for markups. You can likely find a deal lower than sticker price on most trim levels, but for a hot variant like the Civic Type R, a markup is almost to be expected.
Maas points out that dealers can charge whatever they want for a car. “The laws of supply and demand control that. If a customer doesn’t want to pay that charge, they can negotiate. But if there’s only two or three of that car around, they’re not going to have a lot of leverage. They have to decide how bad they want it.”
Schwartz recognizes the profit potential of dealer markups but thinks there’s an equitable way to apply them. At his dealerships, “We don’t look to be greedy—we want to build customers long-term. So if there’s a hot car that commands a markup, we would rather add equipment to the vehicle so there’s actual value. Aftermarket wheels or other equipment enhances the vehicle and the value for the customer, so they’re not just paying for air.”
Still, Schwartz says, “There are unique vehicles that are very short supply, very high demand, that we will sometimes apply adjustments to based on what the market dictates.” Being an enthusiast of a specific car can be expensive.
What Are Tire Fees?
Some states mandate a fee for each tire included on a new car. Obviously, the minimum would be four tires, but vehicles with a spare are charged for five tires. Maas says that tire fees go to an environmental impact fund to “mitigate against microplastics that come off the tires on the road.” Tire fees aren’t more than a few dollars, so they won’t add a significant amount to the total price of your new car.
Fees and Taxes to Watch Out For
Car dealers are notorious for sneaking extra charges into a new car transaction. Taxes, doc fees, and registration fees are to be expected, but be wary of anything else.
Kaufman recalls his personal experience with bogus fees. “I’ve had a couple dealers try to get me with advertising fees, and say it’s non-negotiable.” True, it costs the dealer to post advertisements, but that’s not something that needs to be passed on to the customer—that’s just a cost of doing business, and ad fees are definitely negotiable.
Kaufman also advises to consider a new vehicle’s standard factory warranty against any extended service contracts, sometimes incorrectly called extended warranties, offered by the dealer. He cautions how there can be overlap between the two. “Let’s say the basic warranty is three years, 36,000 miles. The extended warranty, which is the nomenclature but not correct, will cover all those first three years, and another number of years depending on what you buy. But the first three years are worthless because you already have that from the manufacturer. So just in there lies a rip-off.
“If you don’t plan on keeping the car forever, it’s a bad idea to buy an extended service contract. A lot of people will tell you to buy it anyhow, but if you’re expecting that car to have real issues in the first few years, you’re buying the wrong car,” says Kaufman.
Theft deterrent etching, vehicle tracking, and other security measures are also worth scrutiny. You may be able to find the same services elsewhere for a much lower price, without dealer markups.
Ready to Sign?
Buying a new car is an exciting prospect, but don’t rush it. Otherwise, you could pay more than what you bargained for. Always take time to carefully review every document, and ask your dealer to clarify any questions you have.
If you don’t, you could fall victim to tactics like the “five-finger flip.” That’s what Kaufman calls it when dealers “hold their hand over the documents, and say, ‘Sign here, initial here’ without ever giving you a chance to read it. They just have you sign it. And you’re thrilled to sign fast and get out of there—you don’t want to deal with the legal stuff. You just want to sign and go.” Only later will you find out you’ve been ripped off.
Fortunately, many states have regulations that limit these gambits. For example, in California every fee and charge must be listed separately. “Something to watch out for is that all the fees and taxes are properly itemized on the final contract so you can review them.” Schwartz says. Unless the dealer is improperly lumping one charge with another, you’ll see them all listed out.
“Consumers can be exhausted by the sales process,” says Maas, “but the purpose of the process is to give as much information as possible about the transaction and what you’re paying for. The information is there, you just have to look for it. And don’t hesitate to ask the dealer about it; they should explain it to you.”