I’ll start by emphasizing that a lot of this only really applies in Texas, so the lease systems with which you’re familiar are likely quite different. Anyway. I’ve been thinking about the motives and incentives for the parties involved in repeated lease agreements, with regard to sales tax. So let’s establish some background first.
When you lease a new car, you negotiate with a dealer, who has an agreement with a bank. The bank buys a car from the dealer and then rents it to you for a few years. At the end of the rental (lease) term, you give it back to the bank. It was always the bank’s car.
In Texas, sales tax on leases gets weird. At the initial lease origination, the bank (the lessor) pays sales tax (6.25%) to the state for the full purchase price of the vehicle, just like any other buyer would. Then, they typically make you (the lessee) reimburse them for that full tax bill. Which, in my opinion, is stupid, because at the end of the lease, they own a car for which they effectively paid no sales tax, and you as the lessee owed no tax to the state. (Sometimes you’ll pay a negligible use tax.)
Fine, whatever. That’s not the point of my post.
In Texas, when you own a vehicle and you trade in that vehicle as part of the purchase of a new one, you, as the buyer, only owe sales tax on the difference between the trade-in value and the new car’s price.
If I want to trade in a leased vehicle in a similar manner, those rules don’t apply to me. I don’t own the leased car, but I can [usually] sell it to a dealer, who pays the bank their residual and pays me the equity. Then I can lease a different car, which means I pay full sales tax on the new car again. It’s a separate transaction entirely.
But what happens when I want to go lease-to-lease using the same bank? (assume neutral or positive equity.)
Behind the scenes, the bank sells their leased car to the dealer and buys the new one on my behalf in the same transaction. They give me my equity, but then the bank only has to pay sales tax on the difference between the price of the two cars, right? But they’re still going to make me pay them the equivalent of sales tax on the full purchase price of the new one. Because “that’s just how it works in Texas.”
But I don’t have to do it that way. I can sell my leased Mazda to Carmax or whatever, and then go back to the dealer and lease another Mazda. I’m still going to have to pay the same sales tax on the new lease, but this time, so does the bank. So what incentive do I have to help the Mazda bank save some money on sales tax? If I received the same buyout offer from Carmax as from the Mazda dealer, I’d probably just sell it to Carmax out of spite.
Here’s my real-world situation to illustrate. I have a Mazda lease ending soon. My car is worth $22,000, and I want to lease a new Mazda with a sale price of $47,000. If my assumptions are correct, then MFS (TMCC) will only owe Texas state sales tax on the difference—$25,000. They are exempt from the sales tax on the $22,000 value of their trade-in. By selling the car back to Mazda instead of Carmax, I’m saving the bank $1375 in taxes to the state of Texas.
So, with all of that, what is the reason that we don’t see better incentives to trade in a lease for another lease in Texas?
“Because they can get away with pocketing the difference when it does happen” is the obvious answer, of course. But it’s still a free market, and one would think that some enterprising captive banks would start offering a competitive perk to entice more lease-to-lease loyalty.
I know that they often do slip in these sort of “sales tax credits” under L&M line items to make a deal work. But it always comes across as random shenanigans by the dealer to move a bunch of numbers around. And there’s no consistency; you could do the same deal for the same car with three different dealers, and you might get three different utilizations of this hypothetical sales tax delta (if any at all).
It would be so much easier for those of us who like to DIY the lease math to just know this is a standard factor when projecting lease costs. As it stands today, I just kind of include an arbitrary “tax credit” amount in my calculator when I’m coming up with my “desired lease payment” for a given car. Then I just kind of have to hope that the dealer and the bank will figure out how to get there.
In my example above, I figure I’m saving the bank $1375 in sales tax. So I hold my finger in the air, check the alignment of the planets, and say, “I guess it would be nice if they offered me and the dealer $900 of that to help me get a better deal on the next car I’m leasing from them.” I use that in estimating my “goal price” when I go shopping.
In my real-world scenario, I’ve talked to five or six dealers who all offered me very similar prices on the next lease, with very similar appraisals of my trade-in. But one of them—unprompted, other than my persistence in seeking a much lower price—seems to have found $1078 or so, shuffled among a bunch of different factors in the lease equation, to beat the other offers by quite a bit. I have to assume they just chose to apply those sales tax credits to my deal instead of giving them to someone else (like their GM).
Bottom line: All else being equal, I think a customer seeking a lease-to-lease transaction should receive an additional incentive that’s not otherwise available to other prospective lessees. Just, as a general rule.
You listening, Big Banks? I want to pay you less money for a lease. But in return, I’ll try to help you save money on your taxes.
I fully expect the only response to this post to be, “Congratulations. Now you know how banks make money.”
