Do Auto Lease Payments Include Sales Tax?

Auto lease payments do include sales tax. The tax charged on each lease payment is calculated relative to the monthly pre-tax lease payment. While lease payments do include sales tax, however, auto manufacturers and dealerships do not include tax in their advertised lease payments. As a result, visiting a dealership and getting a lease quote can be surprising when the lease payments are higher than advertised. Understanding how tax is applied to car lease payments can help you estimate your lease payments before visiting a dealership.

Tax Amount

The amount of tax that must be paid on an auto lease is based on the total depreciation of the vehicle over the term of the lease. For example, if a vehicle has an MSRP of $20,000 and a 50 percent residual value, the lease end value of the vehicle is $10,000. If you negotiate a selling price of $19,000, the total depreciation over the lease term is the difference between the selling price and the residual value. In this case, the amount is $9,000. You would pay your local tax rate on the $9,000 difference.

Application

Auto lease sales tax is applied on a monthly basis to the base payment, which is the equal to the monthly depreciation plus finance charges. For example, if your base monthly payment inclusive of depreciation and finance charges is $275 and your local tax rate is 7 percent, the monthly tax on your auto lease is $19.25. In turn, your total monthly payment is $294.25.

Buying Out Your Lease

In the event you like your leased car so much you want to buy it out and keep it, there are some unique tax considerations to ponder. During the term of the lease, you have paid sales tax on only the monthly depreciation of the vehicle, not its full value. When you buy out your lease, you must pay sales tax on the residual value or buyout price that you are paying for the car or truck. This is an often point of confusion for consumers who buy out their leases and think the dealership is falsifying the numbers.

Taxes and Down Payments

In the event you make a down payment on your lease, you must pay sales tax on the capitalized cost reduction at the time you start the lease. Capitalized cost reduction is money that is put down at the start of the lease term to lower the selling price of the vehicle and, in turn, lower your monthly lease payment. However, in the long run, there is no difference in the total tax paid out over the lease term.