Do You Pay Sales Tax on a Leased Car in NJ?
Demystify sales tax on leased cars in New Jersey. Explore the rules, calculations, and financial implications for your vehicle lease.
Understanding sales tax on leased vehicles in New Jersey is important for consumers considering a car lease. This tax generally applies to leased vehicles, but its application differs from how it impacts a direct purchase. Knowing these distinctions helps in calculating the total cost and making informed automotive financing decisions.
Understanding Sales Tax on Leased Vehicles in New Jersey
New Jersey imposes a sales tax on motor vehicle leases at the current statewide rate of 6.625%. Unlike vehicle purchases, where sales tax is typically calculated on the full sale price, for leases, this tax is generally applied to the total amount of the scheduled lease payments. This approach is codified under the New Jersey Sales and Use Tax Act (N.J.S.A. 54:32B-1).
For long-term lease agreements exceeding six months, the sales tax on the entire lease amount is often due at the beginning of the lease term. The dealership collects this tax from the lessee and remits it to the state. For short-term lease agreements of six months or less, sales tax is typically paid incrementally with each lease payment.
Calculating the Sales Tax on Your Lease
Calculating sales tax on a leased vehicle in New Jersey involves applying the 6.625% sales tax rate to specific lease components. This includes monthly lease payments and certain upfront charges like acquisition fees. Capital cost reduction payments, such as manufacturer rebates or cash down payments, are also generally included in the taxable amount.
For instance, if your monthly lease payment is $350, the sales tax on that payment would be $23.19 ($350 x 0.06625). While sales tax for a long-term lease is remitted upfront by the dealer, it is often incorporated into your monthly payment structure. Certain fees, such as those for title and registration, are not subject to this sales tax.
Sales Tax Implications in Common Lease Scenarios
Specific situations during or at the end of a car lease can affect how sales tax is applied. When trading in a vehicle, the trade-in value can reduce the taxable basis of a new lease, provided both contracts are executed simultaneously. This reduction can lead to lower overall sales tax paid over the lease term. However, a vehicle currently under a lease agreement cannot be directly traded in; it must first be purchased by the lessee.
If a lease is terminated early and the full sales tax for a long-term lease was paid upfront, the lessee may be eligible for a refund of the sales tax attributed to the remaining, unused portion. This allows for a proportional recovery of tax paid on payments no longer made. Lessees can typically seek this refund from the dealership or directly from the New Jersey Division of Taxation by filing a refund claim.
When a lessee decides to purchase the vehicle at the end of the lease term, or even mid-lease, this transaction is treated as a new sale. Sales tax will be applied to the vehicle’s purchase price, which typically refers to the residual value agreed upon in the lease contract. This sales tax on the buyout is separate from the sales tax already paid on lease payments during the lease term.