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Last Updated: 8/21/2017

Leases

Motor vehicle leases

Motor vehicle leases are subject to the Minnesota general rate sales tax and any local sales taxes that apply. Sales tax is collected on the total up-front lease price and reported on your next Sales and Use Tax return. Up-front leases include:

  • New and used vehicles that require a license plate and have a gross vehicle weight rate of 10,000 pounds or less
  • Vehicles for business or personal use
  • Vehicles principally garaged in Minnesota (Local sales tax also applies if the vehicle is principally garaged in an area with a local tax.)
Sales tax is due up front for lease renewals, just as it is for new leases.

Note: The up-front tax does not apply to rentals of vehicles for 28 days or less or to vehicles with a gross vehicle weight rate of over 10,000 pounds. The federal excise tax on certain heavy trucks is taxable to the lessor on the lease, even if separately stated on the customer’s invoice or contract.

For leases of 28 days or less, see Short-Term Rentals.

Calculating sales tax

The total lease price is taxable. Sales tax is collected on the total lease price and must be collected up-front. To determine the total lease price, subtract any rebates, residual, and trade-in allowance from the vehicle value and add in any taxable add-ons, interest, and finance charges, as shown below:

Vehicle value

- Rebates

- Residual value

- Trade-in allowance

+ Taxable add-ons

+ Interest/finance charges                       

= Total lease price
x 6.875% Minnesota general sales tax
rate and any local sales taxes that apply         

= Sales tax

Vehicle value

The vehicle value is the selling price of the vehicle. It is not necessarily the manufacturer’s suggested retail price. Cash down payments or capitalized cost reductions do not reduce the vehicle value.

Capitalized cost reduction

Capitalized cost reduction is an amount or a combination of amounts that reduce a monthly payment. Examples include:

  • cash down payment
  • trade-in allowance
  • rebate
  • discount
  • credit

Rebate

Any rebate, regardless of origin, is deducted from the vehicle value.  

Residual value

Residual value is what a leased vehicle is worth at the end of the lease term. The amount is documented in the lease.

If the customer buys the vehicle at the end of the lease for the residual amount, that amount is taxable. If the residual amount is adjusted, sales tax applies to any additional amount collected by the lessor when the customer pays for the vehicle.. For example, if the residual amount is adjusted at the end of the lease because of excess mileage, the additional amount is taxable.

Trade-in allowance

The trade-in allowance reduces the vehicle value when a lessor accepts a used vehicle as part of the lease transaction. The customer must own (not lease) the trade-in vehicle and must trade it in to the lessor named on the lease agreement.

If the customer owes money on the trade-in vehicle, the payoff amount to a lender does not reduce the trade-in allowance, even if the payoff amount is included in the new lease transaction.

Interest/finance charges

Interest or finance charges are the cost to carry the amount capitalized under the lease. The example below shows how to calculate tax on a lease.

Vehicle value                                                       $25,000

- Rebates                                                                - 1,000

- Residual value                                                  - 10,000

- Trade-in allowance                                             - 5,000

+ Taxable add-ons                                                   + 400

+ Interest/finance charges                                  + 2,116   

= Total lease price                                               $11,516
x 6.875% Minnesota general sales tax rate                     

= Sales tax                                                             $791.73

If the customer finances the up-front tax, do not include the associated finance charge in the taxable amount. Instead, spread the tax amount and finance charge over the term of the lease as in the example below:

Taxable amount                                                   $11,516

Term of lease                                                ÷ 36 months  

Base monthly payment                                      $319.88

Capitalized tax amount (791.73  ÷ 36)             + 21.99

Interest on capitalized tax                                       +1.50   

Total monthly lease payment                            $343.37


Who collects the tax?

Sales tax is collected by the lessor named on the lease. Typically, the dealer is the lessor on the lease; the dealer may later assign the lease to a leasing company.

Lessors must report and pay the tax on their Sales and Use Tax returns (do not pay the tax to a deputy registrar). If you have local tax to report, report it on the applicable local tax line.

Sales tax on excess mileage fees is collected by the lessor holding the lease contract at the end of the lease.

When the lessee buys a vehicle at the end of the lease term, the lessee must pay the tax on the buyout amount to the Department of Public Safety when they register the vehicle (transfer the title).

Sourcing motor vehicle leases

For vehicle leases or rentals, the source of the transaction for sales tax purposes depends on whether the customer pays all at once or over time:

  • Single payment – sourced to the location where the customer receives the property being leased.
  • Multiple payments – sourced to the primary location of the property, which may not be the same location as the business. The primary location is the address the customer provides for the property and does not change by occasional use at different locations.
Note: These rules do not affect how sales tax applies to lump-sum or accelerated-basis leases, or to the acquisition of property for lease.

What charges are not taxable?

Do not charge tax on:

  • Acquisition, document, title, and registration fees
  • Gap and service contract premiums
  • Insurance
  • Warranty or extended warranty contracts
  • Refundable security deposits

Lease cancellation

Within 90 days or Lemon Law
Sales tax may be refunded if a lease is cancelled within 90 days or the vehicle is returned to the manufacturer under Minnesota’s Lemon Law. The customer may request a refund of the total sales tax paid minus any tax due for the period the vehicle was used.

The lessor must issue the refund if the amount of tax paid up-front is $500 or less. If the tax is more than $500, the customer may request a refund from the department using Form ST11, Sales and Use Tax Refund Request and Multiple Period Amended Return.

After 90 days
If a lease is cancelled after 90 days, the lessor can give the customer a credit, but cannot issue a refund for the tax paid. The customer has 30 days to use the credit on the lease or purchase of another vehicle. The credit reduces the tax on a new purchase or lease of a vehicle.

Note: Only the customer can use the credit; it cannot be transferred or assigned to another person.

Make sure you keep documentation of the lease cancellation, including:

  • Origination date, initial term, and amount of sales tax paid on the cancelled lease
  • Date of the cancellation
  • How the credit was calculated
Tax Credit Calculation

The tax credit is calculated with a prorated lease term based on the number of full months left in the lease:

  • Months remaining in the lease ÷ Months in the original lease agreement = Prorated lease term
  • Prorated lease term x Sales tax paid on the lease = Tax credit

Example: A 36-month lease is cancelled midway through the 12th month. There are 24 months left in the lease. The customer paid sales tax of $1,375 on the vehicle lease. The tax credit is calculated as follows:

  • Prorated lease term = 24 ÷ 36 = 0.67
  • Tax credit = 0.67 x $1,375 = $921.25 

Lease originating in another state

If a lease originates in another state and the customer later transfers the motor vehicle to Minnesota, sales tax may be due in Minnesota. The lessor is responsible for collecting and remitting tax to Minnesota. The tax due depends on when the sales tax is paid and the other state’s tax rate, as shown in the table below.

When is sales tax paid on the lease?

How does sales tax apply in Minnesota?

Up-front on the total lease price

If the other state’s sales tax rate is more than Minnesota:

  • No sales tax is due in Minnesota
  • No tax refund is allowed

If the other state’s sales tax rate is less than Minnesota:

  • Once the vehicle is registered in Minnesota, tax is due on each remaining lease payment
  • The amount is based on the difference in sales tax between the other state and Minnesota (including any local taxes that apply).

On each lease payment

  • Once the vehicle is registered in Minnesota, tax is due on each remaining lease payment.
  • The amount is based on the state general sales tax rate and any local taxes that apply.
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