Do You Pay Taxes on a Leased Car?

Yes, you pay sales tax on a leased car, just like you’d pay sales tax on a car purchase whether you bought it outright with cash or financed a loan. The amount of sales tax you owe depends on state, city, and local tax laws. However, the following states have no sales tax: 

• Alaska
• Montana 
• Delaware
• New Hampshire
• Oregon

If you live in these states, you don’t pay sales tax on a lease. However, part of learning how leasing a car works is understanding that what you pay in sales tax is in addition to: 

• Your monthly lease payment
• Dealership fees, including documentation, registering, titling, etc. 
• A down payment, if applicable
• Any additional fees due at signing

Some states also tax your down payment. If you buy out your lease, you must also pay sales tax on that purchase. Lessors require you to notify them if you’ve moved to another state during your lease so they can adjust your lease sales tax appropriately. 

How car leases are taxed depends on the state you live in. For example, certain states require you to pay sales tax on the total selling price of the car you lease, even though you’re only using it temporarily. Other states require you to pay sales tax on depreciation, which directly results from the difference between the selling price and the residual price established by the leasing company or dealership. 

The following states require sales tax payment on the total purchase price of the vehicle you lease: 

• Texas 
• New York
• Georgia
• Illinois
• Minnesota 
• Ohio 
• Arkansas
• Maryland
• Oklahoma
• Virginia 
• New Jersey

Trade-in vehicles reduce the selling price of the car you lease, allowing you to pay less in sales tax. Dealerships can roll your sales tax into monthly payments if the state assesses sales tax based on depreciation. Look to your lease agreement to determine how sales tax is calculated and paid. 

Calculating your car lease sales tax  

Determining how car leases are taxed and how much you pay in interest requires similar formulas. When calculating interest, you use a lease money factor, but with sales tax, you use your state’s designated sales tax rate. Here are a few examples: 

• If you know your base monthly lease payment, multiply it by the sales tax rate to determine your final payment. For a sales tax rate of 4%, you’d pay $16 per month in interest on a base $400 monthly car payment, bringing your monthly payment up to $416. 
• If you want to know how much you’d pay in sales tax over the lease term, you multiply the monthly rate by the number of months in the lease agreement. A 24-month lease term would result in $384 in sales tax paid in addition to $9,600 paid in monthly lease payments. 
• If you live in a state where you pay sales tax on the full price of the vehicle, multiply the selling price listed in the lease agreement by your local rate. A $50,000 vehicle taxed at a rate of 6% would result in $3,000 in sales tax. Many states that require sales tax on the full price of the car, even for leases, typically require these taxes to be paid upfront as well.

A quick Google search will often display your local sales tax rate. You can also find the sales tax rate for your location on your state’s Department of Revenue website. 

How does leasing a car affect your taxes?

Leasing a car can positively affect your taxes if you live in a state where you don’t have to pay sales tax on the car's selling price. However, the sales tax cost in states that use the selling price on leases can make buying a car more desirable. Ultimately, the selling price of a vehicle has more say on the sales tax than leasing or buying. 

In addition to sales tax, dealerships often charge many other fees that can quickly drive up the price of your lease. Here are a few standard car lease fees to avoid, if possible: 

• Acquisition fee: This fee can cost you up to $1,000, depending on the car you lease. Dealerships may or may not negotiate this fee. 
• Disposition fee: The dealership passes this fee onto you for inspecting and cleaning your newly returned lease car before it goes up for sale. Some dealerships waive this fee if you sign another lease. 
• Early termination: If you cut the lease short, the dealership may charge an early termination fee. This fee can cost you up to the remaining lease payments, depending on how soon you break the lease. 
• Car damage fee: Driving your lease for a few months or even a couple of years can put it through the wringer. These fees include damage beyond normal wear-and-tear, dents, scratches, and dings. Dealerships may also charge you for tire replacement or replacement keys if these components are damaged.

You can also use a lease buyout calculator to determine how much you’ll pay in sales tax if you buy out your lease. The sales tax on a lease buyout is typically calculated based on residual value. For example, an 8% sales tax rate assessed on a $30,000 residual value results in $2,400 in sales tax due. The sales tax payment, remaining lease payments, the lease buyout fee, and any additional fees per the dealership or leasing company can significantly increase the lease buyout costs. 

Your research skills are the key to learning how to lease a car online in 2023. You can find and secure the best car lease deals in your area by contacting local dealerships and leasing companies and inquiring about any specials. You can also negotiate a price with one leasing company, present that deal to another, and ask if they’ll beat it. 

Lease hackers are skilled in finding the best lease deals, but it’s time-consuming. You’re also bound by what deals exist, meaning there’s a limit to how much of a deal you can arrange. Sometimes, it takes too much to work the numbers in your favor. 

In those times, it’s best to consider leasing alternatives like FINN car subscriptions. With a FINN car subscription, you don’t have to worry about negotiating, learning lease terms, or accounting for additional fees that drive up your monthly payments. Instead, you can focus on subscribing to the car you want in a trim level that suits your needs.