Why Lease? Why Now? Cash Flow.
Trevor Watson | April 27, 2020
Sales Tax and Cash Flow Advantage
With traditional Buy Here Pay Here lending on retail installment sales contracts (RISC), state sales tax is paid at the time of the transaction on the sales price of the vehicle. Typically, this means the dealer uses the entire down payment, and often some of their own capital, to pay sales tax. The result is the dealer is immediately cash-negative at the inception of the deal.
For LHPH deals in one of the 31 “pay-as-you-go” states across the nation, the sales tax is calculated only on the actual monies collected by the dealer (i.e. down payment, first payment). Sales tax is then remitted to the state on each lessee payment received for the remainder of the lease. With this structure, the dealer can pay sales tax over time and with the money paid by the lessee, rather than all up front. This helps dealers start leases on a cash positive basis, requiring less capital to grow the business as well as better unit economics throughout the life of the lease.
A simple example would be a car you sell for $12,000 and get a $500 down payment on from the customer. With a BHPH deal in a state with a 7% sales tax, you will owe the state $840 in sales tax when you roll that car. The entire $500 of the customer’s down payment, plus $340 of your own money just went out for tax, and it will take months of successful customer payments before your cash flow recuperates.
If you had leased this vehicle in the same state with “pay-as-you-go” sales tax, you would have paid 7% of the customer’s down payment, or $35 ($500 x 7%), in sales tax to the state when you put the vehicle over the curb. The other $465 of that down payment is yours. You are already in a positive cash flow position from the outset. Now the customer will make a $410 per month payment to you, of which you will remit $28.70 ($410 x 7%) to the state in sales tax each month. Multiply this impact over the 10, 20, 50 deals you roll per month and leasing quickly makes an incredible impact to your cash flow.
If you would like to see a list of the 31 “pay-as-you-go” states or learn more about the other 9 financial and operational advantages of LHPH, download our LHPH E-Book here.