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Motor Vehicle Taxability - Leasing

Motor Vehicle Taxability - Leasing

Most motor vehicle lease agreements prohibit the sale of a leased vehicle from the leasing company to anyone other than the lessee or to a motor vehicle dealer during the lease term. However, there are times when the leasing company will allow the lessee to sell the leased vehicle to a third party.  In that case, the lessee and the third party should, prior to the transfer of the vehicle, enter into a written agreement providing the following:

(1) The lessee has determined the amount required to purchase the leased vehicle from the leasing company;

(2) The third party agrees to provide the funds to purchase the vehicle from the leasing company and pay the sales and use tax due;

(3) The lessee and the third party understand that the leasing company will obtain the title in the lessee’s name, as required by the lease agreement, and that the sales and use tax payment will be in the name of the lessee; and

(4) The lessee agrees to immediately assign the vehicle over to the third party for a price of $0.00.

The agreement should be in duplicate and signed by each party. Each party should retain a copy of the signed agreement. 

This information is based on the Board of Tax Appeals decision in Sarah B. Yocum v. Lindley, BTA 80-A-501 (July 27, 1981) regarding title transfers involving the Ford A-Plan situation.

Note: If the third party has agreed to pay more than the amount required by the leasing company with the additional amount going to the lessee, the additional amount paid by the third party must be shown as the “price” in the assignment portion of the title between the lessee and the third party. Further, if the lessee purchases the vehicle during the life of the lease or at the end of the lease term and then sells the vehicle, each transfer is a separate sale and sales or use tax is due at the time of each title transfer.

A lease assumption is when a lessee has another person assume the lease payments and lease responsibilities. This should not be done without the lessors’ knowledge or approval.

If the lease was consummated in Ohio after Feb. 1, 2002, and there are no changes to the original lease agreement, there is no sales tax due to the State of Ohio.

If an Ohio resident assumes an out of state lease, Ohio use tax may be due and payable up front on the remainder of the lease payments. If the other state required the tax to be paid on each monthly installment, Ohio tax is calculated on the remaining payments and paid up front to the leasing company. If the other state collected tax up front, Ohio tax is calculated on the payments remaining upon entry into Ohio. Credit is given for taxes legally paid to the other state and the leasing company must collect any additional tax due.

 

YES

NO

If a motor vehicle is traded for a new motor vehicle, all-purpose vehicle or off-highway motorcycle in a purchase or lease agreement.

If a motor vehicle is traded for a used motor vehicle, all-purpose vehicle or off-highway motorcycle in a purchase or lease agreement.

If a watercraft, outboard motor or personal watercraft is traded for a new/used watercraft, outboard motor, and/or personal watercraft and the seller (located in-state or out-of-state) is, at the time of sale, licensed as a watercraft dealer through the Ohio Department of Natural Resources, Watercraft Division. License format is OH NNNN ZZ.   

If a watercraft, outboard motor or personal watercraft is traded for a new or used motor vehicle, all-purpose vehicle or off-highway motorcycle.

 

If a vehicle is under a valid lease and the lessee is attempting to trade-in the vehicle that is titled in the name of the leasing company. Under the terms of most lease agreements, the leasing company (during the life of the lease) can only sell (transfer title for consideration) the leased vehicle to the lessee or to a dealer. If the leasing company sells the vehicle to a dealer, it is no longer available to be used as a trade-in by the lessee.  Note: The answer would be yes if the lessee purchased the leased vehicle, paid sales tax on the purchase to the leasing company, titled it in the lessee’s name, and then traded it in on the purchase of a new motor vehicle.

 

If a watercraft, outboard motor, or personal watercraft is traded for a new/used watercraft, outboard motor or personal watercraft and the seller (located in-state or out-of-state) is not, at the time of sale, licensed as a watercraft dealer through the Ohio Department of Natural Resources, Watercraft Division.    

 

If a motor vehicle is traded for a watercraft, outboard motor or personal watercraft.

These charges are NOT taxable for leases:

Credit life and disability insurance premiums

Late charges for payments made after the due date

Collection/repossession fees

Assumption fees billed a lessee when the lease is assumed by another lessee

Legal fees incurred by a lessor for collection proceedings against the lessee

Interim interest billed the lessee on a loan granted by the lessor prior to lease inception

Motor vehicle registration fees

“Noninsurance” fees charged to a lessee that fails to document adequate insurance

NSF (bad check) fees

ACH Debit fees

Parking ticket fees assessed on the leased vehicle and billed to the lessee

 

These charges are taxable for leases:

Luxury taxes

Acquisition fees

“GAP” or “reverse equity” fees

Disposition fees determined at lease termination

Property taxes

Payment or lease extension fees

Rewrite fees

Federal excise taxes levied on the lessor

Administration fees

Maintenance fees

UCC search fees

Title search fees

Excess wear or mileage fees

Turn in fees

Other or miscellaneous fees

Federal highway use tax levied on the lessor

Lien fees, fees for filing a lien against the leased property, when contractually levied on and paid by the lessor but passed on to the lessee

No.  Refunds are allowed on tax paid on leased motor vehicles only if  the lessee returns the vehicle and receives a refund of all amounts paid, including sales tax.

No, unless the entire purchase price, including sales tax, is refunded to the customer.

If the lessee decides to purchase the property, tax must be collected on the purchase price and any other charges associated with the transfer of ownership. For motor vehicles, watercraft and outboard motors, tax is remitted to the Ohio clerk of courts at the rate in effect in the customer’s county of residence.  For other property, the tax is remitted on the leasing company’s sales tax return.

The repayment of the financed tax and any interest on that financed tax is not included in the tax base of the lease for sales and use tax purposes if the records of the vendor and the lease clearly document the total price on which the tax was calculated and the amount of tax collected. The financed tax portion of the lessee’s payment should be separately stated on the lease billings.

Tax must be collected on the total amount to be paid for the initial stated term of the lease at the time the lease is consummated.  For each renewal period, tax must be collected at the time the payment for that period becomes due.

The balance of the lease charges due after the leased equipment is brought into Ohio is subject to Ohio’s upfront sales tax. Credit to Ohio’s tax is given for sales or use tax paid to the other state. If the other state’s tax equals or exceeds the Ohio tax, no additional tax is due.

If the property is brought into Ohio within six months after consummation of the lease, the entire lease amount is subject to the upfront tax.   If the property is brought into Ohio six months after the lease consummation, the sum of the remaining lease payments is subject to tax.  In all cases, the lessee must pay use tax to the lessor as soon as the leased property arrives in Ohio.

No. The mere assignment of a lease to a third party does not result in a new lease.

Cash down payments are subject to the sales tax.   

Prior to Feb. 1, 2002, if a down payment was collected by the leasing dealer, the leasing dealer would also collect the sales tax. The leasing dealer would then remit the tax to the State of Ohio, like any other sales tax payment.

If a down payment is paid to the motor vehicle dealer, the motor vehicle dealer will also collect the sales tax and either remit it directly to the State of Ohio on the dealer's transient sales tax return or forward it to the leasing dealer so that the leasing dealer can remit it to the State of Ohio.

Note:  In either of these situations, tax is not remitted to Clerks of Courts because the motor vehicle will be titled in the leasing company’s name under the "Resale - leasing" exemption.

As of Feb. 1, 2002, the dealer collects the cash down payment as part of the price paid for the lease of the motor vehicle, watercraft or outboard motor. It is charged at the rate in the lessee’s county of residence, and remitted to the State of Ohio on the dealer’s transient vendor’s license.

Yes. Out-of-state leasing dealers/companies are required to be registered with the Department of Taxation, but they may not be required to have a leasing dealer’s permit (LD#) from the Bureau of Motor Vehicles. To title these vehicles in the leasing dealer’s name, use the ATPS exemption code: “RO: Resale – out-of-state leasing.” ATPS will require a valid Ohio use tax account number (99-XXXXXX) before it will proceed with issuing a title without collecting use tax.

Note: This could apply to watercraft and outboard motors.

If the out-of-state leasing dealer has a leasing dealer’s permit issued by the Bureau of Motor Vehicles, you would use the exemption code “RL: Resale – leasing” and you would use the leasing dealer’s permit number and the Ohio use tax account number (99-XXXXXX).

For information on obtaining an out-of-state seller’s vendor license, please visit our website at License and Filing Requirements.

An out of state dealer would charge and collect the tax on the basis as an in-state dealer, that is, on the entire amount the customer would pay over the term of the lease. The tax can be remitted to Ohio in one of two ways.

If the out of state dealer makes frequent leases to Ohio customers, the dealer should register for an Ohio Seller’s Use Tax account on form UT-1000. The tax will be paid when filing sales tax return UST-1.  Registering for an account and filing returns can be completed electronically via the Ohio Business Gateway.   

If the dealer seldom leases a vehicle to Ohio residents, the dealer may submit a copy of the lease agreement, and a check for the tax made payable to Treasurer, State of Ohio.

Send both to:

Ohio Department of Taxation

Sales Tax Division

P.O. Box 530

Columbus, OH 43266-0530

Under Ohio sales and use tax law, a motor vehicle leasing company is required to collect sales and use tax on the “sale” of any of its vehicles, unless the purchaser has a statutory basis for claiming exception or exemption. The leasing company is required to collect the gross amount of sales and use tax based on the rate in effect in the purchaser’s county of residence. The leasing company would then remit the net amount (gross tax less allowable discount) of sales and use tax to any county Clerk of Courts, stating the purchaser’s county of residence so the title can be issued.

In case of an audit by the Ohio Department of Taxation, the leasing company must be able to show that sales and use tax was charged and collected and that this tax was paid to the local Clerk of Courts. Clerks of Courts issue receipts reflecting payment of taxes and associated title fees, which should be retained in the transaction file as evidence that the tax has been paid.

Early Buyout. For leases entered into after Feb. 1, 2002 where a lessee purchases the leased vehicle before the end of the lease, they are allowed credit for part of the sales tax, if the entire amount of sales tax was collected at the beginning of the lease. Part of the buyout purchase price could contain an amount for which tax has already been paid. The Department of Taxation will allow credit for part of the tax paid up front if the following conditions apply:

The sales contract between the leasing company and the lessee/buyer must list a separate amount that represents the present value of the remaining lease payments that are being paid by the lessee. This amount may not exceed the sum of the remaining lease payments. This is an amount for which tax has already been paid. The remainder of the sales contract would list other fees and charges, such as residual value and early termination fees. These items would be subject to the tax.

To determine the tax to be paid to the Clerk of Courts, calculate the entire tax due on the total purchase price of the vehicle, which includes the remaining lease payments, the residual value and any other fees associated with the purchase. Calculate the tax that was previously paid (at the rate in effect when lease began) on the present value of the remaining lease payments. Subtract the previously paid tax from the total tax. Submit the final tax due, less the allowable discount. A copy of the sales contract showing the separable charges must be submitted. If there is no separate line item that represents the present value of the remaining lease payments, no credit allowance will be given.

While a leasing company may not physically obtain the certificate of title for the purchaser (provide paperwork to purchaser and have purchaser obtain his/her own title), the company must ensure payment of the proper amount of tax to the clerks and obtain/retain receipts reflecting the tax payment.

No, the out-of-state leasing company should complete the nonresident affidavit and the clerk of courts will issue an Ohio title using the "OD out-of-state dealer" exemption code.  If the lessee later moves to Ohio or the leasing company starts leasing to Ohio residents, the leasing company MUST register with the Ohio Department of Taxation.

Additional Resources

Additional Resources