The term, lease tax, in car leasing usually refers to sales tax and how the tax is applied to a lease.

The way that sales tax is applied to car leases varies by state. The most common way, and the way it’s done in most states, is that sales tax is applied to the monthly payment, not the entire value of the vehicle. This is one of the benefits of leasing.

Using this method, as an example, if your lease payment was $300 a month and your local sales tax rate was 6.0%, your total monthly payment would be $300 + $18 = $318 a month.

If your make a down payment (cap cost reduction) at the beginning of your lease, you pay sales tax on that down payment amount, at your local rate.

Some states do it differently. For example, in New York, you pay the sales tax up front in cash (or roll it into your lease) based on the sum of your lease payments. In some other states, the tax is due up front but is based on the price of the car, just as if you had purchased the car. If you are not sure how it’s done in your state, consult your state web site, or ask a local car dealer.

For more details, see Car Lease Taxes and Fees.