The terms "leasing" and "renting" can be used interchangeably and refer to the act of granting another the right of possession to and use of a vehicle for a specified time and, ordinarily, for fixed payments.

Industry terminology

“Capitalized (Cap) Cost Reduction” (aka Cap Reduction Payment):

  • Is the amount of money (cash) that the lessee pays at the inception of the lease. This payment is in addition to the first lease payment. Generally, sales tax applies on these amounts.
  • Can also include the application of all or a portion of the value of a trade-in. Generally, sales tax would not be due on this amount as the trade-in allowance would apply.

“Cap Reduction Tax” is actually the sales tax that is due on cash paid at the lease inception toward the leased vehicle.

Series of transactions

A lease is not a single transaction or sale, but a contract for a series of transactions. A lease or rental to the consumer is considered a retail sale. Leases or rentals to those who will re-rent or release the vehicle are wholesale sales.


A vehicle owned by the prospective lessee may be used as a trade-in to lower the amount of the retail sales tax due on the lease. See also Trade-Ins.

Rate of retail sales tax

For a vehicle which is leased or rented for a short period of time, such as when their personal vehicle is being repaired, the retail sales tax rate is the rate of the location of the lessor.

The retail sales tax rate of a vehicle which is leased longer than for a day or week is the rate in effect where the vehicle is usually kept by the lessee, for all lease payments made. The lessor's business location is used for any down payment (capital cost reduction) or payoff payment.

When retail sales tax is due

In either situation, the retail sales tax is due on each payment, when the payment is due.

Brokered lease

A brokered lease consists of: the automobile dealer (broker), a lessee, a financial institution and an automobile (usually in another dealer's lot). The broker pays the Service and Other Activities B&O tax on the commission received for brokering the sale. The dealer who actually provides the vehicle is making an accommodation sale and is not subject to tax. The financial institution is the one who makes the retail sale and is subject to the Retailing B&O tax and must collect the retail sales tax.

Brokered lease - MSO (Manufacturer's Statement of Origin)

In the above brokered lease, if the broker puts the MSO into its own name and then transfers it to the lessee, the broker is making a sale to the lessor (the financial institution), and is subject to the Wholesaling B&O tax. The financial institution will still collect the retail sales tax and pay the Retailing B&O tax.

Lease option - lenders

Dealers may enter into agreements with credit unions or other lenders who have lease and purchase financing options. The structure of the lease option transaction follows:

  1. A credit union member (lessee) wants to lease a specific vehicle with option to purchase.
  2. The auto dealer (lessor) buys the vehicle from a dealer at a fleet price.
  3. The auto dealer computes the balance subject to lease charge which includes the cost of the vehicle, profit, assignment fee, accessories, the first monthly payment, security deposit, titling fee, sales tax, warranty/service contract and any other charges. Credits are allowed to the credit union/lender for titling fee, assignment fee and first monthly payment.
  4. The lessee signs a note with the credit union who pays the selling dealer a prepayment of lease payments.
  5. At the same time, the lessee enters into a "Security and Vehicle Lease Agreement (Closed End with Fixed Purchase Option)" which provides the lease term and balance subject to lease charge, the estimated end of term wholesale value of the vehicle and the total monthly payment (the same as the amount paid to the credit union/lender.)
  6. The selling dealer assigns the lease to the credit union/lender.
  7. The lessee can terminate the lease prior to the scheduled termination date with 15 days written notice. The lessee is liable for a termination fee plus the unpaid principal balance of the loan less the proceeds of a wholesale sale or the determined residual value, whichever is greater.
  8. The lessee has the option to purchase the vehicle at early termination of the lease by payment of a termination fee plus the unpaid principal balance of the loan and taxes.
  9. The lessee has the option to purchase the auto at scheduled termination of the lease by payment of the estimated end-of-term wholesale value of the vehicle and taxes.
  10. The lessee has no equity in the auto unless he/she exercises the purchase option.

Tax liability of lease option

The first monthly payment, which includes the charge for rental and miscellaneous items, is subject to the Retailing B&O tax and the retail sales tax. This payment is received by the dealer from the lender.

The dealer receives prepayment of each monthly payment from the lender. This amount, less the retail sales tax, is subject to the Retailing B&O tax. The retail sales tax has been collected by the lender and is given to the dealer to remit to the Department of Revenue.

The amount received at the scheduled termination of the lease (or earlier) is also subject to the retail sales tax and the Retailing B&O tax.


Since a lease is considered a series of mini sales, the exemptions which apply to retail sales, also apply to leased vehicles. These are:

  1. Nonresidents of Washington, including persons from other countries. See also Nonresidents.
  2. Nonresident military personnel who are stationed in Washington for less than 90 days. See also Military.
  3. Interstate Commerce Carriers with authority to transport across the state's boundaries. See also Interstate And Foreign Commerce Carriers.
  4. Native Americans. See also Native Americans.
  5. The United States Government. See also Government Sales.

Nonresident - special definition

A nonresident is a person who resides in another state, has no residence in Washington, and operates no business in Washington. However, for the purposes of this section, a nonresident can also mean a renter or lessee who has one or more businesses in this state, as well as one or more in other states. The nonresident exemption will only apply to those vehicles most frequently operated, garaged, dispatched and maintained in another state.


Washington Administrative Code (WAC) 458-20-211
Washington Tax Decision (WTD) 6 WTD 141 (1988)
Washington Tax Decision (WTD) 9 WTD 249 (1990)