Applying trade-in allowance to new clean alternative fuel and plug-in hybrid vehicle leases from July 15, 2015 – June 30, 2019
The sales tax exemption for purchases and leases of new clean alternative fuel vehicles has been extended from July 15, 2015 - June 30, 2019 and an exemption for certain plug-in hybrids was added for this period. This article explains how the trade-in allowance applies on lease payments made on qualifying vehicles, including lease payments made after June 30, 2019.
IMPORTANT: The trade-in allowance may not be deducted when determining whether the fair market value of a leased vehicle exceeds the $35,000 cap.
For more information on this exemption, see RCW 82.08.809 and our Special Notice.
General information on trade-in allowances
This sales tax exemption for new clean alternative fuel and plug-in hybrid vehicles does not change how the trade-in allowance is applied to leased vehicles. The trade-in allowance is a reduction in the taxable lease payments (and capitalized cost reduction) for purposes of calculating retail sales tax. The trade-in allowance must be exercised at the start of a lease either by spreading it out over the lease term on a pro rata basis (method 1) or by applying it up front on the initial lease payments (method 2) as outlined below. (See WAC 458-20-247.)
How do you compute the trade-in allowance for leases of new qualifying clean alternative fuel and plug-in hybrid vehicles?
On qualifying leases, only lease payments made from July 15, 2015 - June 30, 2019 can qualify for the exemptions provided by RCW 82.08.809. Vehicles purchased or leased from July 1, 2015 - July 14, 2015 are not eligible for this exemption. Any lease payments made after June 30, 2019, will be subject to retail sales tax (unless there is unused trade-in allowance that applies to such payments). This means buyers and sellers should carefully consider which method they will use to apply the trade-in allowance.
There are two methods available to apply the trade-in value in a lease situation.
Method 1 allows the trade-in value be applied against the value of the leased vehicle, which reduces the monthly payments for purposes of calculating the retail sales tax due on the payments.
Example: A dealer leases a qualifying clean alternative fuel vehicle (with a fair market value of $34,000) for 36 months at $310 a month. The value on which the lease payments are based is $11,160 (36 x $310). The customer trades in a vehicle worth $6,200, which reduces the taxable lease payments to $137.78 per month (($11,160 - $6,200)/36).
No sales tax is due on lease payments made between July 15, 2015 and June 30, 2019 since the vehicle qualified for the above sales tax exemption. However, lease payments due on or after July 1, 2019, will be subject to retail sales tax based on $137.78 monthly payment.
Method 2 allows the trade-in allowance to be applied against the initial lease payments, with no retail sales tax due until the trade in value is used up.
Example: Using the same facts as the previous example, retail sales tax would not be due on the first 20 payments ($6,200/$310) made.
If the 36 month lease of the qualifying vehicle begins on October 1, 2015, with payments due on the first of each month, no sales tax would be due on this lease. The first 20 payments would be exempt from retail sales tax from the trade-in allowance; and the final 16 payments would also be exempt from retail sales tax since the payments would be due before June 30, 2019.
However, if the 36 month lease begins on January 1, 2018, with payments due on the first of each month, no sales tax would be due on the first 20 payments (January 1, 2018 through August 1, 2019). However, the remaining 16 payments starting on September 1, 2019 would be subject to retail sales tax since these payments would be received after June 30, 2019.
The Department’s Auto Dealers Tax Guide discusses trade in value and how it applies to leased items.