Sales Tax Slice: Relocating with a Leased Vehicle May be a Double-or-Nothing Gamble

Along with divorce and death, moving ranks as one of the three most traumatic events one can experience. In addition to the psychological upheaval of starting over, moving comes with significant (and often unanticipated) transaction costs. If you lease a motor vehicle, one of those costs could be sales taxes. Depending on the state you move to, you could end up paying sales tax twice on the same leased vehicle.

Take for example a former New York resident who relocated to Florida with a leased vehicle. Upon initially leasing the vehicle in New York, this individual paid sales tax for the entire lease term. Unlike most states, for long-term motor vehicle leases, New York requires that sales tax be paid upfront based on the total amount of lease payments for the entire lease term. After the lessee moved to Florida the following year, the leasing bank began charging Florida sales tax on the monthly lease payments. Following the lessee’s request for an opinion, the New York Commissioner of Taxation and Finance advised that no refund was available from New York.  

If the taxpayer in this situation had relocated from Florida to New York, the lease payments made following the move would have escaped sales tax entirely. In this situation, New York would source these lease payments to Florida, while Florida would source them to New York.

Anomalies may arise between other states as well. Like New York, New Jersey requires that tax be paid upfront for long-term leases. Unlike New York, New Jersey allows a refund for a portion of this tax paid upfront if leased property is relocated to another state. However, New Jersey is not as kind to outsiders moving to the state. For these recent transplants, the state would source lease payments to leased property’s location in New Jersey. For this reason, a New York-to-New Jersey relocation would present the same problem as the New York-to-Florida relocation. Moreover, post-move lease payments would not escape tax in a Florida-to-New Jersey relocation, as they would in a Florida-to-New York relocation.

The duplicative imposition of tax in New York-to-Florida, New York-to-New Jersey, and similar scenarios may be resolved by the new state of residence’s credit for tax paid in another jurisdiction. However, because these credits typically are granted only against use tax, states differ on whether they apply to leases.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: In the New York-to-Florida scenario, our taxpayer could have avoided double taxation by exercising an option to purchase the motor vehicle prior to leaving New York. What drawbacks might there have been to this?

Take a  free trial to Premier State Tax Library , a comprehensive research service that delivers deep, unique analysis, and time-saving practice tools to help practitioners make well-informed decisions.