Auto Leasing: Are You Being Taxed Twice?

10 Jun Auto Leasing: Are You Being Taxed Twice?

Double Taxation

UPDATE: After contacting the offices of Susan Combs, the Texas Comptroller of public accounts, I was able to get some clarification on the issue.  Tax is not due a second time if and only if the buy-out cost of the leased vehicle is less than market value (rarely the case) OR if the lease agreement includes a “must purchase” clause (typically known as balloon financing).  It is true however that when you first pay taxes, you are simply covering the amount owed to the lessor by the dealership if applicable.  In other words, as in any other business scenario, the costs of doing business are simply being passed onto the consumer.

 

How would you feel if I told you there’s a strong likelihood you are being double-taxed during lease buyouts?

Back in May 2008 I leased a new Infiniti G37S coupe, and three years later I decided to purchase the vehicle at lease-end. Curious by nature and following my desire to be informed, I wanted to find the answer as to why we Texans pay full sales tax on a leased vehicle when other states get to only pay tax on the depreciated value of the vehicle throughout its lease term (that is its cost minus its residual). After hours of research I came across some interesting findings.

According to LeaseGuide.com, Texas laws require that the lessor (the lease company) pay sales tax on the full value of any vehicle they buy from a dealership and lease back to a lessee (you and me). Not wanting to absorb the cost of the tax, 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. The practice of pass-through taxes however, is just that – a practiceand not law. If the lessee decides to purchase the vehicle at lease-end, 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. Interesting right?

I checked the Texas Leasing Sales Tax Laws and in layman’s terms, section (b) states: if, at the end of the lease, the vehicle is sold by the lessor to the lessee and the lease contained an “option to purchase” clause, the amount subject to the motor vehicle sales tax will be the total consideration paid the lessor by the lessee under the agreement since the agreement will be considered a sale rather than a lease agreement. Section (c) states: If the transaction is considered to be a sale and not a lease, as described above, no additional motor vehicle sales tax is due at the time the initial lessee/purchaser takes title to the vehicle, provided the correct amount of tax was previously paid on the total consideration. If the correct amount of tax was not paid on the total consideration, the lessee/purchaser must pay the difference when the vehicle is titled in his name. Based on the above facts, seeing that all Texas lessees pay a 6.25% sales tax figure on the full sales price of the vehicle, consumers should not be liable for paying taxes once again when buying out their lease.

Back to my story. Armed with this information I decided to contact some dealerships regarding this matter before buying out my lease back in 2011. After speaking to the employee in charge of lease buy-outs at the dealership where I originally leased the car from, I was surprised to hear I would be liable for paying taxes once again. After checking with other dealerships in the area they all seem to agree with his answer, but seeing that they did not hold a copy of my contract, they could not help me further. Could it be this old common practice of passing along taxes eradicated leasing sales tax laws from the minds of these auto finance professionals? Perhaps, but I decided to contact the owner of the dealership to see if I could get an explanation other than “everyone does it so you must too.” To my surprise I received a response from the owner a couple of hours later. In his e-mail he stated this was the first time he had ever heard of such law and informed me he would forward this information to his legal team in Austin, TX. The following day a second e-mail from him stated I was in fact correct, however as a result of a loophole in this tax law, dealerships get away with charging tax a second time through lease buy-out transactions. Left with no choice or time to contact an attorney, I paid the taxes once again and bought out my G. In my opinion, competitiveness in the marketplace is essential, but manipulating laws and abusing loopholes is not an ethical way of doing business.

As I sit here two years later, two questions still roam my mind: What is this “loophole” they found? And could we possibly stitch it closed? As a consumer it’s always important to be informed and knowledgeable of laws and regulations that impact important aspects of life such as your financial decisions.

As I seek an answer to my questions, I’d like to invite you to join us and continue to Red-Line Your Knowledge!

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