Sales Tax on Leases

Most states tax automotive leases by charging sales tax on the monthly payment and any cap reductions paid in cash.

Example:

Gross Cap Cost: $25,000
Cap Reduction paid in cash: $2,000
Net Cap Cost: $23,000
Residual: $14,820
Monthly Payment at 8.0% for 36 mos: $352.78
6% Sales Tax on Monthly Payment: $352.78 x .06 = $21.17
Total Payment with Tax: $352.78 + $21.17 = $373.95 

In addition to the tax on the monthly payment, you must pay tax on the $2,000 cash cap reduction payment at signing:

$2,000 x .06 = $120.

Total Tax Paid:

$21.17 each month for 36 months = $762.12
Plus $120 tax on cash cap reduction           
Total Tax: $882.12

Taxing the payment stream on a lease results in significantly less tax than if you were to purchase the same vehicle. In the above example, the tax on a purchase would be:

$25,000 x .06 = $1500 or 70% more tax than the lease.

Note: States that tax the monthly payment stream generally exclude the value of any trade-in from sales tax.

Not all states tax leases this way (be sure to check with a local tax collector's office to find out how your state taxes automotive leases). Below are the exceptions.

Illinois
Illinois taxes the full purchase price of the lease as though you purchased the car. The full amount of the tax is due at signing.

New York
New York taxes the sum of the lease payments plus any fees paid in cash. Security Deposit, registration and title fees are exempt though.

New Jersey
New Jersey taxes the sum of the payments less finance charges. This is another way of saying they tax the vehicle's depreciation over the period of the lease.

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