SU12 Leases and Rentals

Rev. 3/23

Leases and Rentals

Tax Topic Bulletin S&U-12

Introduction....................................................................................................................................................................... 1

General Information ....................................................................................................................................................... 2

Short-Term Rentals/Leases Duration of Six Months or Less .......................................................................... 2

Open-Ended Rentals ................................................................................................................................................. 2

Long-Term Rentals/Leases Duration of More Than Six Months ................................................................... 2

Option 1 — Original Purchase Price Method .................................................................................................. 3

Option 2 — Total Lease Payments Method ..................................................................................................... 3

Remitting Sales and Use Tax ....................................................................................................................................... 5

Assigned Leases ............................................................................................................................................................... 5

Assumption of Leases .................................................................................................................................................... 6

Conditional and Installment Sales ............................................................................................................................ 6

Purchasing Property Intended for Rent/Lease ..................................................................................................... 6

Exempt Transactions ...................................................................................................................................................... 6

Property Exempt Due to Its Use ............................................................................................................................ 7

Exempt Organizations and Governmental Agencies .................................................................................... 7

Urban Enterprise Zones ............................................................................................................................................ 8

Out-of-State Lessees ................................................................................................................................................. 8

Property Leased Out of State Brought Into New Jersey for Use in This State .................................... 8

Property Leased in New Jersey Transferred Out of State ............................................................................ 9

Registration ....................................................................................................................................................................... 9

Connect With Us .............................................................................................................................................................. 9

Introduction

This publication explains how and when Sales and Use Tax is imposed on lease and rental

transactions in New Jersey. It provides information on the correct procedures for charging,

collecting, and remitting Sales Tax on lease and rental transactions. It also explains who is

responsible for paying Sales and Use Tax and which transactions are exempt from tax.

Leases and Rentals

Rev. 3/23

General Information

The rental or lease of most tangible personal property in New Jersey is subject to the State’s

Sales and Use Tax

. Tangible personal property means physical property other than real

property, such as land and buildings. The Division treats rental/lease transactions as retail

sales.

lessor

is any owner of leased or rented property, including anyone who subleases the

property they are leasing. A

lessee

is someone who leases or rents property from a lessor, and

also may be referred to as a renter if the rental/lease is short-term.

Short-Term Rentals/Leases Duration of Six Months or Less

The lessee/renter is considered the end user of the rented property and is responsible for

paying Sales Tax on the amount of each rental payment. The lessor is required to collect the

tax from the renter and remit it to the State.

Example

An individual rents a forklift for one week. The rental company must collect 6.625% Sales Tax

from the individual on the rental charge and remit it to the State by the date the next Sales

and Use Tax return is due.

Open-Ended Rentals

The Division will treat a transaction as a short-term agreement if it is the lessor’s normal

business practice, and the intent of the parties, to enter into an open-ended agreement

without a defined duration. For instance, if a lessor leases property to many lessees over the

life of the property, it may indicate that the lessor’s normal business practice is to rent month-

to-month rather than lease the property, even though a particular customer may use the

property for several months before returning it. Likewise, property-use agreements that have

a stated term of less than six months but that can be extended by the renter, are treated as

short-term rentals/leases. The renter must pay Sales Tax on the rental payments; no

accelerated collection is required.

Long-Term Rentals/Leases Duration of More Than Six Months

Sales and Use Tax rules for long-term rentals/leases differ from rules for short-term

rentals/leases. The law requires the accelerated collection of Sales Tax for agreements with a

term of more than six months. The

lessee

is considered the end user of leased property and

the one responsible for paying Sales Tax. The lessor is required to collect Sales Tax from the

Leases and Rentals

Rev. 3/23

lessee and remit it to the State. The lessor must choose one of the following methods to

calculate the Sales Tax due:

1. The Original Purchase Price Method; or

2. The Total Lease Payments Method.

The lessor and lessee may negotiate the method to be used. Regardless of the method

selected, the full tax is due upfront.

Option 1 — Original Purchase Price Method

Using this method, the lessor collects and remits tax only once on the property. The tax is

calculated on:

• The amount the lessor paid for the property being leased;

plus

• Any separately stated charges for transportation to the lessor’s place of business;

plus

• The cost of any accessories or options installed or any services performed by the lessor (or

others on the lessor’s behalf) on or in connection with the leased property;

less

• The value of the lessee’s trade-in, if any (see Lessee’s Trade-In Credit on page 5 for more

information).

When calculating the purchase price, the lessor

cannot

deduct the value of a trade-in vehicle

the lessor received when acquiring the property being leased.

A lessor who also is the manufacturer of the leased property cannot use the Original Purchase

Price Method to calculate the tax due from the lessee. The manufacturer didn’t purchase the

leased property; so there cannot be a purchase price. The manufacturer only purchased the

components or parts used to manufacture the property. Thus, the manufacturer can only use

the Total Lease Payments Method to calculate the tax due on a lease.

Option 2 — Total Lease Payments Method

Using this method, the lessor must collect and remit tax

every time

the property is leased. The

tax is calculated on:

• The lease amount (including depreciation, interest, or finance charges, often referred to as

the “money factor”);

plus

• “Acquisition fees,” capital cost reduction payments, and all other fees and charges paid to

the lessor that represent the lessor’s charge for the lease;

plus

• Any manufacturer’s rebate or reimbursed coupon applied toward the cost of the lease;

plus

Leases and Rentals

Rev. 3/23

• Any charge for “doc fees” (documentary fees imposed by the dealership);

less

• The value of the lessee’s trade-in, if any (see Lessee’s Trade-In Credit on page 5 for more

information);

less

• Any “negative equity” (when the market value of a trade-in vehicle is less than what is owed

by a lessee) that is rolled into the lease;

less

• Any prior lease payment balance that is rolled into the lease;

less

• Sales Taxes that are rolled into the lease;

less

• Fees imposed by the New Jersey Motor Vehicle Commission.

Example

A lessor agrees to pay $16,500 for a new vehicle after an $800 trade-in credit on an older

vehicle. The dealer charges $975 in transportation costs. The manufacturer’s suggested retail

price (sticker price) of the new vehicle is $19,100. The lessor enters into a 60-month lease with

a lessee who requests that the lessor install $1,800 worth of additional options in the vehicle.

The lessee makes a $2,500 cash down payment, and the lessor pays off the $3,210 balance of

the lessee’s existing lease. Fees amount to $1,000, and the lease amount is $20,340.

The lessor may choose either of the following methods to determine the amount of tax due:

Option 1 - Original Purchase Price Method

Lessor’s purchase price $16,500.00

Lessor’s trade-in credit + 800.00

17,300.00

Transportation charge + 975.00

18,275.00

Lessor-installed options + 1,800.00

Tax base 20,075.00

New Jersey Tax @ 6.625% x .06625

Lessee’s tax due $1,329.97

If tax is paid on the purchase price of

leased property, it is not due on any

subsequent lease of that particular

item, no matter how many times the

property is subsequently leased.

Leases and Rentals

Rev. 3/23

Option 2 - Total Lease Payments Method

Lease amount $20,340.00

Fees + 1,000.00

21,340.00

Cash down payment + 2,500.00

23,840.00

Trade deficit - 3,210.00

Tax Base $20,630.00

New Jersey Tax @ 6.625% x .06625

Lessee’s tax due $1,366.74

Lessee’s Trade-In Credit. If the lessor accepts trade-in property of the same kind as partial

payment for a lease, the value of the property can be used to reduce the tax base only if the

purchase and trade-in occur at the same time. The tax base

can’t

be reduced if the lessee

trades in leased or rented property for the credit, or if the lessor won’t hold the property for

sale, lease, or rental. If the lease involves motor vehicles, the trade-in credit is only available if

the lessor is a dealer of motor vehicles registered with both the New Jersey Motor Vehicle

Commission and the New Jersey Division of Taxation. The dealer must obtain the certificate of

title for the trade-in vehicle and retain a copy of it as part of the lease transaction.

The trade-in credit can be used when calculating the Sales Tax due from the lessee using either

the Original Purchase Price Method or the Total Lease Payments Method. Dealers are required

by law to separately state Sales Tax on all invoices provided to the customer. This includes

the initial invoice that outlines a transaction price negotiated with the customer

and

the final

invoice provided to the customer when they take delivery of the vehicle.

Remitting Sales and Use Tax

The lessor must remit the full amount of tax due to the State by the due date of the next

quarterly Sales and Use Tax return or monthly remittance. Filing Sales and Use Tax Returns

provides information on how and when to remit Sales and Use Tax.

Assigned Leases

A lease assignment occurs when the lessor (assignor) assigns the rights and title to the leased

property to a new lessor (assignee).

A lease assignment doesn’t affect Sales Tax because it results in a new lessor, not a new lease.

If tax is paid on the total of the lease

payments, each time a lease ends and a

new lease begins, the lessor must

choose whether to collect tax on the

purchase price (not the fair market

value at the time) or on the total of the

new lease payments.

Leases and Rentals

Rev. 3/23

When the original lessor assigns the rights to a lease to a new lessor, additional tax is not due

from the lessee because the lessee was already charged Sales Tax.

Assumption of Leases

A lease assumption allows one person (new lessee) to assume an existing lease from another

person.

As long as the terms and conditions of the lease remain intact, (e.g., same lease payment,

same interest rate, same term)

and

the new lessee isn’t required to sign a lease contract, the

lease assumption is not treated as a new lease.

However, if a lessor requires that the new lessee enter into a lease agreement for the

remainder of the term, the agreement creates a new lease and tax is due from the new lessee.

Conditional and Installment Sales

Certain property-use agreements, even if in the form of a lease, may be treated as conditional

or installment sales contracts. An agreement that requires the transfer of title after the

purchaser/lessee makes all required payments and pays an option price that does not exceed

the greater of $100, or 1 percent of the total required payments, is considered to be a sale

rather than a lease. Thus, the purchaser/lessee is not required to pay Sales Tax until the transfer

of possession or control of the property occurs. The seller

must collect

Sales Tax from the

purchaser/lessee on the contract price and remit the full amount to the State by the due date

of the seller’s next quarterly Sales and Use Tax return or monthly remittance.

Purchasing Property Intended for Rent/Lease

Lessors do not pay Sales Tax when purchasing property they intend to rent or lease, as long

as they issue a fully completed New Jersey Resale Certificate (Form ST‑3)

or the Streamlined

Sales and Use Tax Agreement Certificate of Exemption (Form ST-SST) to their registered

supplier.

Exempt Transactions

Generally, transactions that qualify for an exemption as a sale will qualify for an exemption as

a rental or lease.

For every exempt transaction, the lessee must fully complete the appropriate exemption

certificate and provide it to the lessor. When a valid exemption certificate is issued, no New

Jersey Sales or Use Tax is due.

Leases and Rentals

Rev. 3/23

Sales Tax is due if the leased property was subsequently leased for or converted to a

nonexempt use or is leased to a nonexempt lessee.

Property Exempt Due to Its Use

Certain property is exempt from tax when rented/leased for a particular purpose. For example,

certain machinery and equipment are exempt if used directly and primarily to produce

tangible personal property. Buses for public transportation are exempt, as are commercial

trucks, truck tractors, tractors, semitrailers, and vehicles used in combination therewith that

have a gross vehicle weight rating in excess of 26,000 pounds or are operated actively and

exclusively in interstate commerce. When renting or leasing such property, the lessee must

issue a fully completed Exempt Use Certificate (Form ST‑4)

or the Streamlined Sales and Use

Tax Agreement Certificate of Exemption (Form ST-SST) to the lessor.

See the New Jersey Sales Tax Guide for more information about which products and services

are subject to tax. See Sales Tax Exemption Administration for information about exemption

certificates.

Exempt Organizations and Governmental Agencies

Some organizations such as churches, hospitals, veterans’ organizations, and fire companies

are not required to pay Sales Tax when they rent or lease property for the exclusive use of the

organization. The Division of Taxation issues an Exempt Organization Certificate (Form ST-5)

only to those organizations that qualify for exempt status with the State of New Jersey. A

lessor who rents or leases to such an organization must obtain a photocopy of the

organization’s ST‑5 certificate as evidence of the exempt nature of the transaction.

Agencies of the federal government and the United Nations, as well as the State of New Jersey

and its political subdivisions, such as counties and municipalities, also are exempt from paying

Sales Tax. However, these organizations do not use ST‑5 certificates. Instead, they must

provide the lessor with a copy of a valid purchase order or contract, signed by an authorized

official. When the amount of the transaction is $150 or less, the lessor may accept a fully

completed Exempt Use Certificate (Form ST‑4) from these organizations in place of a purchase

order or contract.

Federal employees are exempt from Sales Tax on leases and rentals when payment is made

by federal check or voucher. Such transactions also are exempt if payment is made with a GSA

SmartPay credit card having a 0, 6, 7, 8, or 9 as the sixth digit of the account number (credit

card centrally billed to and paid by the federal government). If payment is made with a GSA

Leases and Rentals

Rev. 3/23

SmartPay card having a 1, 2, 3, or 4 as the sixth digit, the card is individually billed to and paid

by the employee, and the federal government exemption does not apply.

• If payment is made with a GSA SmartPay credit card having a 5 as the sixth digit, the

taxability of the transaction depends on the purchase, since expenses can be either

centrally or individually billed. Car rentals are centrally billed to and paid by the federal

government, and are exempt from Sales Tax. Other travel-related incidentals are

subject to tax as they are individually billed to and paid by the employee.

Certain lease and rental transactions by foreign diplomatic and consular personnel residing in

the United States also are exempt from Sales Tax. There are two types of Sales Tax exemption

cards issued by the U.S. Department of State, Office of Foreign Missions, that are acceptable

as proof of the exemption. Personal Sales Tax exemption cards are issued for the sole benefit

of the individual identified on the card. Mission tax exemption cards are issued to embassies,

consulates, and international organizations for official purchases only and for the sole benefit

of the mission identified on the card.

For more information, see Tax Treatment of Nonprofit Organizations and Government Entities

and Diplomatic/Consular Sales Tax Exemptions. Also visit the U.S. Department of State, Office

of Foreign Missions’ website.

Urban Enterprise Zones

A qualified business located within a designated Urban Enterprise Zone is exempt from paying

Sales Tax on many items it rents or leases for its own use. When renting or leasing to one of

these businesses, the lessor must obtain a fully completed Urban Enterprise Zone Exempt

Purchase Certificate (Form UZ‑5) from the lessee.

The Urban Enterprise Zone exemption is

not valid

for transactions that involve motor vehicles,

telecommunications services, room rentals, or admissions.

Out-of-State Lessees

No tax is due when a New Jersey lessor leases property to an out-of-state lessee who takes

delivery of the property outside New Jersey. The lessor is only responsible for collecting New

Jersey Sales Tax if the lessee brings the property into New Jersey for use in this State.

Property Leased Out of State Brought Into New Jersey for Use in This State

If a lessee brings property leased outside New Jersey into New Jersey for use in this State, the

lessee must pay Sales Tax. However, the lessee may take credit for taxes paid to the other state

Leases and Rentals

Rev. 3/23

if the lessee can document that they were paid. The credit for taxes paid to the other state is

available

only

if the other state taxes leases in the same manner as New Jersey, i.e., taxes the

lessee.

For example: An out-of-state lessee brings an automobile into New Jersey mid-lease. The

lessor elects to charge Sales Tax using the Total Lease Payments Method and determines the

tax to be $400 on a 48-month lease. If there are 12 months remaining on the lease, the lessee

must pay New Jersey Sales Tax of $100 (12/48 times $400). The lessor must collect tax from

the lessee on each monthly payment and remit the tax to the State.

Property Leased in New Jersey Transferred Out of State

If a lessee transfers property leased in New Jersey out of state, and the lessee paid New Jersey

all the Sales Tax at the beginning of the lease, the lessee is eligible for a refund of tax for the

period of time that the property is not located in the state.

Registration

Sellers of tangible personal property for lease or rent in New Jersey are required to register

with the State as a seller and must collect and remit Sales and Use Tax to the State. Businesses

can register online

through the Division of Revenue and Enterprise Services’ NJ Business

Gateway Services website.

For more information about starting a business in New Jersey, see our Starting a Business Tax

Guide.

Connect With Us

Email your State tax questions;

Visit a Regional Information Center;

Call 609-292-6400;

Subscribe to our NJ Tax Alert E-News;

Leases and Rentals

Rev. 3/23

In March 2023, this document was revised to include information about payments made with a

GSA SmartPay credit card that has 5 as the sixth digit.

This document is designed to provide guidance to taxpayers and is accurate as of the date issued.

Subsequent changes in tax law or its interpretation may affect the accuracy of this publication.