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Motor Vehicle Leases

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Sales tax on motor vehicle leases is collected on the total up-front lease price and reported on your Sales and Use Tax return. Motor vehicle leases are subject to:

6.875% state general rate sales tax
Any applicable local sales taxes

Up-front leases include:

New and used vehicles that require a license plate and have a gross vehicle weight rate of 10,000 pounds or less
Vehicles for business or personal use
Vehicles principally garaged in Minnesota. Local sales tax also applies if the vehicle is principally garaged in an area with a local tax.

Lease Renewals

Sales tax is due up front for lease renewals. This does not apply to:

Rentals of vehicles for 28 days or less
Vehicles with a gross vehicle weight rate of over 10,000 pounds.

For leases of 28 days or less, see Motor Vehicle Short-Term Rentals.

Calculating Sales Tax

Charge sales tax on the total lease price. To calculate the total lease price, subtract any rebates, residual value, and trade-in allowance from the vehicle value and add any taxable add-ons, interest, and finance charges, as shown below:

Vehicle value

- Rebates

- Residual value

- Trade-in allowance

+ Taxable add-ons

+ Interest/finance charges

= Total lease price

x 6.875% Minnesota general sales tax rate and any local sales taxes that apply

= Sales tax

Vehicle Value

The vehicle value is the selling price of the vehicle. It is not necessarily the manufacturer’s suggested retail price (MSRP). Cash down payments or capitalized cost reductions do not reduce the vehicle value.

Capitalized Cost Reduction

Capitalized cost reduction is any upfront payment that reduces the cost of financing. Examples include:

Cash down payment
Credit
Discount
Rebate
Trade-in allowance

Rebate

Any rebate, regardless of origin, is deducted from the vehicle value.

Residual Value

Residual value is the vehicle's total value at the end of the lease term. This amount is documented in the lease.

If the customer buys the vehicle for the residual value, that amount is taxable.

If the residual value is adjusted by the lessor, sales tax is due on any additional charges. For example, if the residual value of the vehicle is adjusted due to excess mileage fees, these additional charges are taxable.

Trade-In Allowance

The trade-in allowance reduces the vehicle value when the lessor accepts a used vehicle as part of the lease transaction. The customer must own (not lease) the trade-in vehicle and must trade it in to the lessor named on the lease agreement.

If the customer owes money on the trade-in vehicle, the payoff amount to a lender does not reduce the trade-in allowance, even if the payoff amount is included in the new lease transaction.

EV Credits and Leases

The type of electric vehicle (EV) credit and when it is applied will determine how it applies to the sales price of a motor vehicle lease.

What type of electric vehicle (EV) credit is being used?	When is the EV credit received?	How is the EV credit handled in the sales price of a motor vehicle lease?
Federal EV credit	The EV credit is passed on to the customer at the time the motor vehicle lease is initiated	The EV credit qualifies as a rebate that reduces the sales price
Federal EV credit	The EV credit is not passed on to the customer at the time the motor vehicle lease is initiated or creates another option that is not used when the lease is initiated	The EV credit does not reduce the sales price
Minnesota EV rebate	The EV rebate is used at the time the motor vehicle lease is initiated	The EV rebate reduces the sales price
Minnesota EV rebate	Later, after the customer completed the motor vehicle lease	The EV rebate does not reduce the sales price

Interest or Finance Charges

Interest or finance charges are the cost to carry the amount capitalized under the lease. The example below shows how to calculate tax on a lease.

Vehicle value	$25,000
- Rebates	- $1,000
- Residual value	- $10,000
- Trade-in allowance	- $5,000
+ Taxable add-ons	+ $400
+ Interest/finance charges	+$2,116
= Total lease price	$11,516
x 6.875% Minnesota general sales tax rate
= Sales tax	$791.73

If the customer finances the up-front tax, do not include the associated finance charge in the taxable amount. Spread the tax amount and finance charge over the term of the lease.

Collecting the Tax

The lessor named on the lease collects the sales tax. Generally, the dealer is the lessor.

Lessors must report and pay the tax on their Sales and Use Tax returns. Do not pay the tax to a deputy registrar. If you have local tax to report, report it on the correct local tax line.

Sales tax on excess mileage fees is collected by the lessor holding the lease contract at the end of the lease.

Nontaxable Leases

Who is the customer?	They can lease the following vehicles exempt from sales Tax
Ambulance service	Ambulances leased to an ambulance service (public or private) licensed under Minnesota Statutes 144E.10. See Emergency Services.
Federal government and its agencies	All vehicles
Metropolitan Transit Council	Buses

Who is the customer?

They can lease the following vehicles exempt from sales Tax

Ambulance service

Ambulances leased to an ambulance service (public or private) licensed under Minnesota Statutes 144E.10.

See Emergency Services.

Federal government and its agencies

All vehicles

Metropolitan Transit Council

Buses

Nontaxable Charges

Do not charge sales tax on:

Acquisition, document, title, and registration fees
Gap and service contract premiums
Insurance
Warranty or extended warranty contracts
Refundable security deposits

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Lease Cancellation [+]

Within 90 Days or Lemon Law

A lessor may refund sales tax if a lease is cancelled within 90 days, or the vehicle is returned to the manufacturer under Minnesota’s Lemon Law. The customer may request a refund of the total sales tax paid minus any tax due for the period the vehicle was used.

Amount of refund	How to Request the Refund
$500 or less of tax paid	The customer must request the refund from the lessor
More than $500 of tax paid	The customer may request a refund using Form ST11, Sales and Use Tax Refund Request

After 90 Days

When a lease is cancelled after 90 days, the lessor can give the customer a credit but cannot refund the tax paid. The customer has 30 days to use the credit on the lease or purchase of another vehicle. The credit reduces the tax on a new purchase or lease of a vehicle.

Note: Only the customer can use the credit; it cannot be transferred or assigned to another person.

Keep documentation of the lease cancellation, including:

Origination date, initial term, and amount of sales tax paid on the cancelled lease
Date of the cancellation
How the credit was calculated

Tax Credit Calculation

The tax credit is calculated with a prorated lease term based on the number of full months left in the lease:

Months remaining in the lease ÷ Months in the original lease agreement = Prorated lease term

Prorated lease term x Sales tax paid on the lease = Tax credit

Example

A 36-month lease is cancelled midway through the 12th month. There are 24 months left in the lease. The customer paid sales tax of $1,375 on the vehicle lease. The tax credit is calculated as follows:

Prorated lease term = 24 ÷ 36 = 0.67
Tax credit = 0.67 x $1,375 = $921.25

Lease Originating in Another State [+]

When a lease originates in another state and the customer later transfers the motor vehicle to Minnesota, sales tax may be due in Minnesota. The lessor is responsible for collecting and remitting tax to Minnesota. The tax due depends on when the sales tax is paid and the other state’s tax rate, as shown in the table below.

When was sales tax paid to the other state?	How does sales tax apply in Minnesota?
Up-front on the total lease price	If the other state’s sales tax rate is more than Minnesota: No sales tax is due in Minnesota No tax refund is allowed If the other state’s sales tax rate is less than Minnesota: Once the vehicle is registered in Minnesota, Minnesota sales tax is due on each remaining lease payment The sales tax amount is based on the difference between the other state's sales tax rate and the sales tax rate due in Minnesota (including any local taxes that apply)
On each lease payment	Once the vehicle is registered in Minnesota, Minnesota sales tax is due on each remaining lease payment The amount is based on the state general sales tax rate and any local taxes that apply

When was sales tax paid to the other state?

How does sales tax apply in Minnesota?

Up-front on the total lease price

If the other state’s sales tax rate is more than Minnesota:

No sales tax is due in Minnesota
No tax refund is allowed

If the other state’s sales tax rate is less than Minnesota:

Once the vehicle is registered in Minnesota, Minnesota sales tax is due on each remaining lease payment
The sales tax amount is based on the difference between the other state's sales tax rate and the sales tax rate due in Minnesota (including any local taxes that apply)

On each lease payment

Once the vehicle is registered in Minnesota, Minnesota sales tax is due on each remaining lease payment
The amount is based on the state general sales tax rate and any local taxes that apply

Legal References and Resources

Minnesota Statutes

297A.61, Definitions
- subd. 7, Sales price
- subd. 18, Person with a disability
297A.67, General exemptions
- subd. 11, Automobiles, disabled veterans
297A.815, Motor vehicle leases
297B.01, Definitions
297B.02, Tax imposed