Qualifying hybrid vehicles and vehicles powered by clean alternative fuels leased through a trade-in
This article highlights the tax application when a qualifying hybrid or alternative fuel vehicle is leased when a trade-in allowance applies. For further information on the exemption for qualifying hybrid and alternative fuel vehicles, see our Special Notice.
Important changes to the hybrid vehicle sales and use tax exemption – Effective August 1, 2009, Engrossed Substitute Senate Bill (ESSB) 6170, sections 801 and 802 repeals the sales tax and use tax exemption allowed on purchases of qualifying hybrid vehicles. The exemption from the Motor Vehicle Sales/Use Tax (.3%) remains in effect on the purchase of new hybrid vehicles until January 1, 2011.
Prospective purchasers should note that delivery must be made before August 1, 2009, in order to qualify for the exemption for qualifying hybrid vehicles. For example, if a purchaser orders a qualifying hybrid on May 15, 2009 and takes delivery on July 30, 2009, the purchase qualifies for the exemption. However, if a purchaser orders a qualifying hybrid on May 15th and takes delivery on August 15, 2009, the purchase does not qualify for the exemption.
Note - Lease payments due under the lease agreement after August 1, 2009 on qualifying hybrid vehicles will become subject to sales tax. For example, if a lease of a qualifying hybrid vehicle was entered into on January 1, 2009, only the lease payments due under the lease agreement through July 31, 2009 qualify for the exemption from the retail sales and use tax, notwithstanding that the lease agreement was entered into prior to the effective date of the legislation. However, the remaining lease payments due under the lease agreement through December 31, 2010, will still be exempt from the Motor Vehicle Sales/Use Tax (0.3%).
Alternative Fuel Vehicles
Engrossed Substitute Senate Bill (ESSB) 6170 did not change the sales tax and use tax exemptions allowed for the purchase of qualifying new vehicles that use clean alternative fuels, such as natural gas, propane, hydrogen or electricity.
Following are instructions for applying trade-in allowances to qualifying clean alternative fuel vehicles.
General information on trade-in allowances
The trade-in allowance has not changed and is to be applied in the same manner as before the alternative fuel vehicle retail sales tax exemptions. The trade-in allowance is a reduction in the taxable selling price or taxable lease payments for purposes of calculating retail sales tax. The trade-in allowance must be exercised at the inception of the lease either by applying it up front on the initial lease payments (method 1) or by spreading it out over the lease term on a pro rata basis (method 2) as outlined below.
How do you compute the trade-in allowance for leases of qualifying alternative fuel vehicles?
The retail sales tax exemption for the sale of alternative fuel vehicles is available from January 1, 2009, through December 31, 2010; therefore, only those lease payments that fall due during that timeframe will qualify for the exemption. Any lease payments for periods on or after January 1, 2011, will be subject to retail sales tax. For this reason, the buyer and seller 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 qualifying clean alternative fuel leased vehicle, thereby reducing the monthly payments (and usually the retail sales tax due on those payments).
Example of method 1: The value of the leased vehicle upon which the lease payments are based is $36,000. The lease of the qualifying vehicle is for 36 months at $1,000 per month. The customer trades in a vehicle for $20,000. The customer receives a reduction in the taxable amount ($36,000 – $20,000 = $16,000) on which the lease payments are based, resulting in taxable lease payments of $444.44 per month for 36 months (instead of $1,000 per month).
In this case, the trade-in allowance is used to reduce the taxable monthly lease payments. However, no retail sales tax is due on lease payments from January 1, 2009 through December 31, 2010, because of the retail sales tax exemption for qualifying clean alternative fuel vehicles. The lease payments ($444.44 per month) that are due on or after January 1, 2011, will be subject to retail sales tax.
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. (Please note, however, that retailing B&O tax applies on the $20,000 trade-in allowance under method 2 because the trade-in allowance is not a deduction from the B&O tax.)
Example of method 2: The value of the qualifying clean alternative fuel leased vehicle upon which the lease payments are based is $36,000. The lease of the qualifying vehicle is for 36 months at $1,000 per month. The customer trades in a vehicle for $20,000. The dealer applies the trade in value against the initial lease payments. There are no lease payments and not sales tax due for the first twenty months of the lease.
If the lease begins January 1, 2010, the first 20 months of the lease will be exempt from retail sales tax under the trade-in allowance because there will be no lease payments due for this timeframe, through August 2011. After that date, retail sales tax will apply on the lease payments.
The Department’s Auto Dealers Tax Guide discusses trade in value and how it applies to leased items.