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Tax Advantages in Pay-As-You-Go States with Leasing

Eyo Toe | November 21, 2022

When current LHPH dealers are asked what made them transition to leasing, many of them will say the sales tax benefits. There are currently 32 states who are considered pay-as-you-go states meaning sales tax is only paid on the money received from the customer, as opposed to the retail price of the vehicle on a Retail Installment Sales Contract. This is no small advantage when you see how it affects your dealership from a cash flow perspective.

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This BHPH vs. LHPH Sales Tax Calculator allows you to input your averages and see what your sales tax impact would look like with a buy-here-pay-here program and lease-here-pay-here program side by side. For example, let’s say your average retail price is $15,000 with an average down payment of $1,500, tax rate of 6.25%, and 15 deals per month. You’ll see that with the BHPH program, more than half of the down payments received is being used by the dealer to pay for sales tax without the customer even making their first payment! On the leasing side, sales tax is only paid on the down payment giving the dealer the opportunity to be cash positive at the inception of the deal.

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The positive cash flow impact with a leasing program is monumental not only from a monthly perspective, but an annual perspective as well.

What if you are not in a pay-as-you-go state? Each state has their own specific laws when it comes to sales tax, sometimes providing benefits without being a pay-as-you-go state. Texas is a great example because although the sales tax is paid upfront in a lease, it is only paid once during the lifetime of the vehicle (regardless of whether it is released or sold after the first turn) AND dealers receive a tax credit on the remaining value once the car is liquidated which can be used to pay sales tax on future vehicles. We encourage you to consult with your attorney to determine what other options are available if you are not in a pay-as-you-go state as each state is unique.