Why Car Lease Taxes are Bigger but not Better in Texas

Lease a car in Houston, San Antonio, Austin, or Dallas, or any other city in Texas and pay full sales tax

In most states, sales tax is paid on monthly lease payments, not full vehicle value. Not in Texas. Maybe the philosophy is that bigger is better. But that is not the case with leasing and taxes.

Texas laws require that the lessor (the lease company) pay sales tax on the full value of any vehicle they buy from a dealer and lease back to a lessee (you and me). This is different from most other states in which no such tax is charged to the lessor, or the tax is administered in a different way.

Of course, Texas lessors don’t want to absorb the cost of the tax. If they did, there would probably be no leasing in Texas. Therefore, the lease company simply passes along the tax bill to the leasing customer. The leasing customer therefore pays full sales tax just as if he was buying the vehicle, not leasing.

Be aware that the practice of pass-through taxes is just that – a practice – and not law. However, leasing customers have little chance of negotiating lessor taxes out of a deal.

Even though the tax actually comes out of customers’ pockets, customers are not credited with having paid the tax. From the perspective of the state, the tax is being paid by the lessor – the lease company – not the customer, which leads to another injustice that we’ll explain in a moment.

What is the difference?

Let’s look at an example in which a car is leased in Texas, where the state motor vehicle tax rate is 6.25% and compare lease cost to a similar lease, with the same tax rate, in a state that only taxes monthly payments.

We’ll assume that the Texas lessee rolls his sales tax into the financed (capitalized cost) portion of the lease — does not pay the tax in cash.

In our example, the vehicle’s cost is $30,000, the lease term is 36 months, residual value is $15,000, and interest rate is 6.5% (money factor: .00271).

Our Texas lease customer must pay full sales tax of $1875 added to the $30,000 cost of his vehicle. Using our Lease Calculator, we find the monthly payment – $596.00.

In another state, for the same vehicle, same price, and same tax rate, the monthly payment is only $572.69. This amount is made up of a $539 base payment with $33.69 sales taxed added.

The difference of $23.31 a month is simply extra tax that provides Texas customers no benefit. It adds up to $839 over the life of the lease. For this reason, leasing is more expensive in Texas than most other states.

Is there additional tax if you buy at lease-end?

Most lease contracts have lease-end purchase clauses that allows the leasing customer to buy his vehicle at the end of the lease, if he chooses to do so. Otherwise, the vehicle is returned to the lease company.

Texas state laws consider the sale of a vehicle by a lease company at lease-end to be a separate sale, although a special one, and the lessee is not charged sales tax again if the correct amount of tax was paid originally at the beginning of the lease.

For additional information and a summary of Texas car leasing sales tax laws, see this page from the Texas Administrative Code.

The information contained in this article is not meant to be legal or financial advice. It’s accuracy is not guaranteed. You should consult your state tax authorities or a financial advisor if you want further information and tax advice.