Do You Pay Taxes on a Leased Car?

While you do have to pay taxes on any leased vehicle, the rules on when and how will differ by state and lessor.
Written by Macy Fouse
Reviewed by Jessica Barrett
Whether you’re leasing or financing a car, you’ll have to pay your state’s sales tax on the purchase. When and how you pay it, however, will depend on your state and leasing company.
If you’re looking for a new ride, financing may be the most common option—but it’s not the only option...or even the most budget-friendly. If you don’t drive often and prefer lower monthly payments to the commitment of car ownership, leasing may be the perfect fit for you. You’ll still have some of the same costs as financing a car though—including the amount of tax you’ll pay.
Navigating leases and taxes can get stressful and confusing. That’s why
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for your leased car!
Let’s get the ball rolling.

Do you pay sales tax on a leased car?

In most cases, yes, you’ll still have to pay sales tax when you lease a new car, but this could vary depending on where you live. While you won’t necessarily pay the entire amount upfront based on the value of the car in most states, places like
New York
, and
do require the sales tax to be paid upfront. However, it’s more common to pay sales tax across each monthly lease payment.
For instance, if your lease payment ends up being $500 a month and the leased car sales tax in your state is 6%, your total monthly payment will be $530.
There are plenty of situations where your sales tax methods will differ in your lease deal, though. For instance, making a down payment or having a trade-in vehicle can affect the amount of sales tax you’ll pay with each month’s bill. Each states has its own rules, though, so be sure to check out the specific tax laws where you live.
MORE: How to calculate a car lease payment
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Other fees when leasing a car

Taxes aren’t the only extra expense you need to be aware of when leasing a car. You’ll also have to pay a handful of fees—and not all of them are made obvious from the get-go.
It’s important to note that some lease fees are official fees, but dealers can also add on extra fees that sound official but only exist for their profit. Official fees can’t be negotiated, but the additional dealer-specific fees usually can.

Down payment and first payment

Making a down payment (called “capitalized cost reduction” for leases) isn’t usually a requirement for leasing a vehicle, but if you’re able to, it’s a great way to lower monthly expenses throughout your lease term—sometimes including the monthly sales tax portion of your lease payment. If you trade in a vehicle, you may also get a sales tax credit based on the trade in value, depending on where you live.
That being said, some states require you to pay taxes on your down payment amount when you sign your lease. If it’s not required, you may be able to choose to combine the monthly amounts of sales tax and pay it as part of the upfront capitalized cost.
Other states may require you to pay sales tax spread out across each month—and they may not even give you the option of paying the lump sum sales tax upfront.
When leasing a motor vehicle, you’ll also have to make your first car lease payment upfront as well—and this does not count as part of a down payment or any other kind of deposit or fee.

Security deposit

Some vehicle leases will require you to pay a security deposit upfront when you sign your lease, particularly if you have a lower credit score. This fee is often around the same amount as your monthly payments will be. Without any mileage or damage charges, this fee will usually be refunded to you when your lease term ends.
With some lease companies, making a security deposit is an option to lower your money factor (basically, the interest rate for leasing).

Acquisition fee

An acquisition fee will be included in your capitalized cost, although it may not be evident in your lease contract. Also known as a bank fee, this is simply an administration charge due at the signing of your lease.
The acquisition fee usually costs between $500 and $1,000, depending on your dealership. The leasing company sets this price, but sometimes dealers will increase the amount to make a profit, so it pays to do some research before heading in to sign on the dotted line.
If you don’t see or hear this fee mentioned, be sure to ask if it’s included. You may also have the option to push back paying this fee until further into the lease.

Disposition fee

A disposition fee is similar to the acquisition fee, but it’s due at the end of the lease agreement. Averaging around $350, this fee pays for the lessor’s expenses of selling the vehicle after you finish with it. Not all companies require this, and it’s often waived if you decide to purchase your leased vehicle at the end of your lease term. 
If the leasing company still tries to charge you the disposition fee even though you’re purchasing your leased car, you may be able to negotiate out of it. You can also apply your security deposit refund to pay for your disposition fee.
MORE:How to prepare a car for inspection when returning a lease

State registration fees

While most fees depend on the specific leasing company you choose, state registration fees are—you guessed it—set by the state you live in. These state registration fees apply whether you lease or purchase a vehicle. The amounts of these fees, which include tag, title, and registration fees, will also differ depending on the state.
Dealers are merely the middle man for these fees—they just collect the payments and send them to the government agency that requires them. That’s why these fees aren’t up for negotiation.

How to find cheap car insurance for your leased vehicle

Leasing may be saving you some money, but
insuring a leased vehicle
is often more expensive than covering a financed car. That’s because leasing companies often require you to have specific amounts of coverage, so it’s crucial for you to find a policy that has it all and is affordable.
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This amount will be the same as your state sales tax rate.
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