Some transactions are exempt from Motor Vehicle tax depending on who purchases the vehicle, as listed in the table below. For these sales, you must keep on file Form PS2000, Application to Title/Register a Vehicle, showing the exemption code.

For more information, see:

• Emergency Services
• Government – Local Governments

The following title transfers are not taxable: 

• By inheritance, including transferring a motor vehicle inherited upon death
• From joint tenancy to one of the joint tenants for no monetary consideration
• From an individual into the individual’s revocable trust.
• Between husband and wife in a divorce proceeding
• By gift between:
  • Spouses
  • Parents and a child
  • Grandparents and a grandchild

No affidavit is required when a gifted motor vehicle is transferred between these relatives.

• Between related companies as defined in Internal Revenue Code sections 118, 331, 332, 336, 337, 351, 355, 721, 731, 1031, 1033, or 1563(a). For more information, see Isolated and Occasional Sales.
• A gift to a 501(c)(3) nonprofit organization when the motor vehicle is used exclusively for religious, charitable, or educational purposes
• A gift from a limited used vehicle dealer licensed (nonprofit charitable organization) to an individual – if there is no monetary or other consideration, or the expectation of consideration. The transferring parties must sign an affidavit when transferring the title.

If you bought and titled your vehicle under your name for at least 60 days in the other state, tax is not due when you register the vehicle in Minnesota.

If a Minnesota resident registered and paid sales tax to another state, Minnesota allows credit for tax paid to the other state. If the other state’s tax rate is lower, then tax is due on the difference in rates to Minnesota.

If a buyer has a dealer’s or lessor’s license and is in the business of selling or leasing vehicles, the purchase for resale is not taxable. Without a dealer’s license, individuals cannot purchase a motor vehicle exempt for resale.

The type of dealer’s license the buyer has restricts what vehicles they can buy for resale. For example, a person licensed as a used car dealer cannot buy a new car exempt for resale. For more information, contact the Dealer’s Unit of the Department of Public Safety at 651-201-7800.

Dealer Plates

Motor vehicle dealers must place dealer plates on any vehicle they buy for resale and use for demonstration purposes, which include use by:

• the dealer, dealer's spouse, or any full-time employee of the dealership
• a part-time employee for business purposes of the dealer
• prospective buyers

It is illegal to use dealer plates on vehicles that are used for other purposes such as loaner vehicles, tow trucks, service trucks, or parts vehicles.

Interstate truckers may have a Motor Carrier Direct Pay authorization that allows them to pay a prorated tax on their vehicle when it is registered with the Department of Public Safety.

For more information, see Transportation Service Providers.

If vehicles are not registered for road use, they are not subject to the Motor Vehicle Sales Tax. Examples include:

• All-terrain vehicles
• Certain trailers
• Mini-bikes
• Off-road motorcycles
• Other off-road vehicles

Note: These vehicles are subject to the Minnesota general sales tax rate and any local sales tax rate that applies.

For more information, see the Off-Road Vehicle. Off-road vehicles may have to be registered with the Minnesota Department of Natural Resources (DNR). For more information, see the DNR website.

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.)  

Note: Sales tax is due up front for lease renewals, just as it is for new leases. 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.

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:

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

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

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.

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:

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.

Do not charge sales tax on:

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

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.

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 

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.

Repair materials and repair paint become part of the vehicle or are consumed in providing the vehicle repair services. This does not include repair parts.

Examples of repair materials include:

• Abrasives
• Chamois
• Lubricants
• Waxes

Examples of repair paint include:

• Body paint
• Paint thinner
• Clear coat
• Primer
   

If you purchase repair materials and repair paint exempt for resale, you must charge sales tax to your customer when you use them. If you pay sales tax on the purchase of materials and repair paint, do not charge sales tax to your customer. You must use a consistent method throughout your business.

For more information, see the Motor Vehicle Repair Industry Guide.

Applying paint sealer is not a taxable service unless it is part of the initial sale of a vehicle. Paint sealer is exempt only when it is applied as part of the original sale of the motor vehicle.

Auto body and automotive repair labor is not taxable when it is separately stated from repair parts on the invoice. Repair labor restores an item to its original condition so it can be used for its original purpose.

Parts used to repair or service a vehicle are taxable to the customer. Parts are easily assigned to a repair or service and have a fixed or definite price.

Do not pay sales or use tax when you purchase these parts to use in your business. Instead, give your supplier a completed Form ST3, Certificate of Exemption. Specify the Resale exemption.

Examples include:

• Alternators
• Belts
• Catalytic converters
• Cylinder head gaskets
• Fuel pumps
• Ignition coils
• Oxygen sensors
• Piston rings
• Spark plugs
• Tires

A core charge is a deposit for a repair part charged at the time of purchase. The core charge is part of the taxable sales price when the part is subject to sales tax.

When the old part is returned, the core charge and the sales tax collected on the charge are refunded to the customer.

You must pay sales or use tax when you purchase shop supplies used to clean or maintain the shop, equipment, and tools. Common examples include “floor dry” products, cleaning products, and rags – though cleaning products and rags may be exempt if they are used up while making repairs.

For more information, see Motor Vehicle Repair.  

If you subcontract with another business for repair work or services, do not pay sales or use tax on your purchase. Instead, give the subcontractor a completed Form ST3, Certificate of Exemption. Specify the Resale exemption. You must charge sales tax to your customer for any taxable subcontracted labor, parts, or materials. Charges for repair labor are not taxable.

Labor to add or install something new or different to a vehicle is taxable. The installed parts are also taxable to the customer. Examples include:

• Installing remote starters, navigation systems, and sunroofs
• Installing bug deflectors and running boards
• Upgrading a sound system
• Installing customized vehicle accessories; such as adding dual exhaust, adding fuel injector control chips, etc.
• Adding power locks, remote starters, cruise control, or window defrosters
• Installing a remote car starter or theft alarms

Optional maintenance contracts provide prepaid coverage for maintaining a vehicle. These contracts include taxable items and nontaxable repair labor for one price. Examples include:

• Oil changes
• Tire rotation
• Wheel balancing

 
Optional maintenance contracts are taxable, unless the cost of the taxable items is insignificant and is not easily measured. No sales or use tax is due when the contracted maintenance is performed.
 
If an optional maintenance contract is sold with a motor vehicle, then the contract is taxed at the 6.875 percent general sales tax rate and applicable local taxes.

Parts that are replaced or repaired under a warranty, recall, or service contract are taxed differently based on the terms of the agreement.

Repair labor or replacement parts are not taxable when they are covered by a manufacturer’s warranty or recall. The parts used are considered an exchange of inventory. 

Used car dealers in Minnesota must provide a warranty with the sale of certain used cars. If you sell such a vehicle and later make repairs under the warranty, no tax applies to the parts used in the repair.

Repair or replacement parts covered by a warranty or guarantee are not taxable when included in the purchase price of a rebuilt engine, transmission, etc.

Extended warranties to cover unexpected repair costs are not taxable. However, sales or use tax does apply to the parts used for contracted repairs. The following examples will tell you when tax is due and who pays it.

Note: Do not report the Motor Vehicle Sales Tax on your sales and use tax return. Report the Motor Vehicle Sales Tax to the Driver and Vehicle Services of the Department of Public Safety. 

• 144E.10, Ambulance service licensing
• 168.27, subd. 16, Dealer plates
• 297A.61, Definitions
  • subd. 3 (g)(6) (ii), Motor vehicle washing, waxing, cleaning
  • subd. 7, Sales price
  • subd. 18, Disabled
• 297A.64, Rental motor vehicle tax imposed
  • subd. 1, Tax imposed
  • subd. 2, Fee imposed
  • subd. 3, Administration
  • subd. 4, Exemptions
  • subd. 5, Payment of excess fees
• 297A.67, General exemptions
  • subd. 11, Automobiles, disabled veterans
  • subd. 12, Parts and accessories used to make a motor vehicle disabled accessible
• 297A.815, Motor vehicle leases
• 297A.90, Interstate motor carriers as retailers
• 297A.992, subd. 2. Authorization; rates
• 297B.02, Tax imposed

• 8130.0700, Producing, fabricating, printing, or processing of property furnished by consumer

• 96-20, Sales and Use Tax – Exemption for Rebates to Purchase Motor Vehicles
• 05-05, Sales and Use Tax – Definition of Reasonable Rental Value of Motor Vehicles
• 06-08, Sales and Use Tax – Motor Vehicle Leases-Taxes and Fee
• 16-03, Optional Warranty and Maintenance Contracts on Equipment

• Advertising
• Laundry and Cleaning Service
• Lawn and Garden Maintenance, Tree and Shrub Services
• Local Sales and Use Taxes
• Sales to Governments
• Tribal Governments and Members
• Use Tax for Businesses

• Building Cleaning and Maintenance
• Emergency Services
• Government – Federal and Foreign Diplomats
• Government – Local Governments
• Government – State Agencies
• Motor Vehicle Repair
• Off-Road Vehicle
• Transportation Service Providers
• Vending Machines and Other Coin-Operated Devices