Can You Just Explain the Sales Tax Law?

When Eugenio Cornier bought a car in 2003, he lowered his monthly payments by taking out a balloon loan.

The novel financing was an alternative to leasing, which virtually stopped for several years in New York State because of a provision of state law. The law allowed personal injury accident victims to sue the company the held title to a leased car.

Congress enacted a federal law eliminating vicarious liability on leased vehicles last year. As a result, auto leasing is back in New York. But questions about the balloon loans offered in its absence remain.

Balloon loans create the lower monthly payments of leasing, but transfer ownership of the vehicle to the buyer. Under plans like GM’s Smart Lease or Ford’s Red Carpet Option, buyers make a fixed payment for a certain number of months and a larger final or balloon payment.

The final or balloon payment is equal to the estimated value of the car at the end of the term. The buyer can make the payment and keep the car or return the car to the dealer, just as he would with a lease.

Cornier of Queens made a down payment on his car to cover state sales tax, registration and other fees. Now he plans to keep the vehicle. But he has questions about potential taxes he may owe. Do I have to pay sales tax again?? he asked.

No. When you lease a car, state law requires you to pay sales tax only on the amount the car will depreciate during the lease term. However, balloon payment plans require the buyer to pay NYS sales tax on the full value of the vehicle at the time of delivery.

If the buyer makes the balloon payment–either in cash or by refinancing the balance with another loan–he won’t have to pay any sales tax. It was paid in full already.

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