FAQs - Sales and Use Tax

Can a third party purchase a leased vehicle without payment of sales and use tax twice?

Most motor vehicle lease agreements prohibit the sale of a leased vehicle from the leasing company to anyone other than the lessee or to a motor vehicle dealer during the lease term. The agreements are written this way to protect the lessee, in that the leasing company cannot sell their vehicle to just anyone during the life of the lease. However, there are times when the lessee wants out of the lease and finds someone (third party) who is willing to purchase the vehicle from the leasing company.  

When the above situation occurs, the lessee and the third party should (highly recommended) enter into a written agreement (before the event occurs) that basically stipulates the following:

(1) The lessee has determined the amount required to purchase the leased vehicle from the leasing company;

(2) The third party agrees to provide the funds to purchase the vehicle from the leasing company and pay the sales and use taxes that will be due;

(3) The lessee and the third party understand that the leasing company will obtain the title in the lessee’s name, as required by the lease agreement, and that the sales and use tax payment will be in the name of the lessee; and

(4) The lessee agrees to immediately assign the vehicle over to the third party for a price of $0.00.  

Special Note: If the third party has agreed to pay a higher “price” than the “price” required by the leasing company (difference going to the lessee), the difference between the “price” paid by the third party and the “price” paid to the leasing company should be reflected as the “price” in the assignment portion of the title between the lessee and the third party. The “price” does not include the amount of sales and use tax paid when the title transfers to the lessee.

The agreement needs to be duplicated and signed by each party. Each party needs to have a copy of the signed agreement to protect their interest and resolve any tax questions that may arise when the title transfers between the lessee and the third party.

This position taken here is similar to the Board of Tax Appeals decision in Sarah B. Yocum v. Lindley, BTA 80-A-501 (July 27, 1981) as it applied to the two title transfers involving the Ford A-Plan situation.

Note: If the lessee decides to purchase the vehicle during the life of the lease or at the end of the lease term and then find a buyer for the vehicle, the above procedure would not apply. We would consider these as two separate sales and sales/use tax is due on each title transfer.