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California May Reduce Sales Tax for Clean, Green Vehicles

  • Mar 5, 2015 | Gail Cole

 California wants more of these on the road.

Lawmakers in California are considering legislation that would reduce sales tax for clean and green motor vehicles. The goal is to encourage more Californians to purchase zero-emission and similar environmentally friendly vehicles.

Close to 33 million vehicles are currently registered in California, and “the transportation sector constitutes the greatest source of pollution, accounting for 40% of the state’s greenhouse gas emissions.” Replacing gasoline and diesel-powered vehicles with more green options would help reduce emissions. It would also help meet Governor Brown’s goal of having 1.5 million electric or hybrid vehicles on California roads by 2025. 

New vehicles

Under Assembly Bill 945, the following new vehicles would be exempt from the state sales tax:

  • Cars powered by compressed natural gas
  • Electric cars
  • Cars powered by hydrogen fuel cells
  • Plug-in hybrid cars

The above cars would be taxed at a rate of 3.06% rather than 7.5% state rate.


Trade-ins would be eligible for the greater of two following incentives:

  • The 3.6% rate of sales tax (same as for new eligible vehicles), or
  • The 7.5% state rate “on the new car price after trade-in value is deducted.”

Assemblymember Phil Ting (D) of San Francisco introduced AB 945, rising to the governor’s challenge to lawmakers “to be innovative to protect the environment, stimulate economic growth and improve the quality of life.” The last time he introduced similar legislation it died, “primarily because of concerns over funding.” If AB 945 becomes law and is in effect from 2016 to 2020, it “could cost California more than $92 million a year in lost tax revenue.”

Yet he thinks his measure will be more successful this time around, now that there is revenue from the state’s cap-and-trade program. “We must make electric vehicles more affordable for more people,” Mr. Ting said. “This is the quickest, most effective way to incentive consumers. There’s no bureaucracy to deal with, no rebate to mail in.”


The makers of the Chevy Volt plug-in hybrid and the Nissan Leaf both support the bill, noting, “Anything that makes it easier for the customer to understand and is part of the deal in the show room just adds to the benefit.”


Tom Libby, analyst at IHS Automotive, said that while the measure “could have an effect on sales,” it will not double them. “The demand for both hybrid and electric vehicles is not growing.” And John O’Dell of Edmunds.com said the bill is “still tending to reward people who are probably less in need of a reward. Poorer people aren’t going to be able to afford these cars unless they give them away.”

Keep your business on top of changing sales tax rates, rules and exemptions in California and other states. Learn more.

photo credit: Nissan LEAF "Blue Ocean" via photopin (license)

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.