Will I Pay Sales Tax When Buying My Leased Car?

Dear Driving for Dollars,

My lease is almost up and I would like to purchase the car. The dealership is telling me that I will need to pay sales tax on the original price, $22,880, not the residual value of $14,020. I thought the sales tax was calculated on the residual value only. Who is right?

- Ronald

Dear Ronald,

Sales tax on leased cars varies from state to state, but it's best to check. You may already have paid the required taxes.

While the way sales tax is calculated on leased cars varies from state to state, it is likely that what the dealer is telling you about needing to pay the sales tax on the original price of the car is wrong.

Chances are you have already paid at least some sales tax on the car, so it's highly unlikely you need to pay taxes on the original price of the leased car. Most states roll the sales tax into the monthly payment of the car lease, though a few states require all the sales tax for all your lease payments up front. In a couple states, such as Texas, lessees must pay sales tax on the full value of the leased car (what you described as the original price) versus just the tax on payments during the time of the lease.

You may not only have paid some sales tax on the car already, but possibly all of it. Go back to your original lease paperwork and you should find a breakdown of the taxes. Then, contact your state's Department of Motor Vehicles or visit its website for clarification on how sales taxes are calculated on leased cars in your state.

Remember, too, that you can turn in a leased car or do a buyout of your leased car at any franchised dealer that carries your brand. If you are uncomfortable working with the dealer you originally leased the car through, simply take your business to another dealership.

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