in-20251203-IR-045250699NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE Information Bulletin #28L Sales Tax November 2025 Effective Date: Upon Publication (Replaces Bulletin #28L, dated August 2023) SUBJECT: Leases of Motor Vehicles & Trailers REFERENCES: IC 6-2.5-1-5, IC 6-2.5-1-6, IC 6-2.5-2-2, IC 6-2.5-2-3, IC 6-2.5-3-6, IC 6-2.5-3-7, IC 6-2.5-4-10, IC 6-2.5-5-38.2, IC 6-2.5-13-1 DISCLAIMER: Information bulletins are intended to provide nontechnical assistance to the general public. Every attempt is made to provide information that is consistent with the appropriate statutes, rules, and court decisions. Any information that is not consistent with the law, regulations, or court decisions is not binding on either the department or the taxpayer. Therefore, the information provided herein should serve only as a foundation for further investigation and study of the current law and procedures related to the subject matter covered herein. SUMMARY OF CHANGES Apart from nonsubstantive, technical changes, this bulletin has been updated to provide additional guidance on the exclusion of negative equity from tax and credit for taxes paid to other states. It has also been updated to address situations where the seller is the initial lessor and not an agent of the ultimate lessor. INTRODUCTION The lease of any motor vehicle or trailer shall be subject to Indiana sales or use tax unless the transaction is entitled to a statutory exemption. The auto dealer may be the initial lessor or they may be acting as an agent for the ultimate lessor (leasing company or financial institution) in order to prepare and execute a lease arrangement between the lessee (customer) and the lessor. The lessor is responsible for the collection, reporting and remittance of the Indiana sales or use tax on a lease and must register with the Indiana Department of Revenue. For the remainder of this bulletin, the “lessee” refers to the customer, and the “lessor” refers to the leasing company or financial institution. RESIDENT VERSUS NONRESIDENT LEASES The taxability of a lease is not based upon the residency of the lessee. The determination is based upon the vehicle’s or trailer’s state of primary property location, per terms of the lease agreement. A lease is subject to Indiana sales tax if the vehicle is to be primarily located within Indiana. A lease where the vehicle is to be primarily located in another state will be subject to that state’s sales or use tax and will not be subject to the Indiana sales tax. The lessor shall collect and remit the appropriate sales tax to the appropriate taxing jurisdiction. The state sales tax to be collected on a lease of any motor vehicle or trailer must be determined using Indiana’s sourcing rules at IC 6-2.5-13-1. The term “sourcing” refers to rules used to determine which state’s sales tax is applicable to a transaction. The taxation of lease income is treated differently under Indiana’s sourcing rules than income derived from sales of motor vehicles. A lease originating in Indiana is subject to Indiana sales tax if the “primary property location” of the vehicle or trailer is indicated on the lease as being located in Indiana. The determination of which state’s tax is to be collected on a lease is different for a periodic lease versus a lease that does not require periodic payments. Leases With Periodic Payments For a lease or rental that requires recurring periodic payments (monthly payments), all lease payments (down payments, manufacturer’s rebates, equity in trade-in resulting in a capital cost reduction, and each periodic lease payment) are to be sourced to the primary property location of the motor vehicle or trailer. The primary property location shall be as indicated by an address for the property provided by the lessee that is available to the lessor from its records maintained in the ordinary course of business, when use of this address does not constitute bad faith. This address shall not be altered by intermittent use at different locations. A nonresident may enter into a lease contract where the lease is originated at the Indiana dealership but the motor vehicle’s primary location (where the vehicle is to be registered or licensed) is another state. Sales or use tax on the lease will be due to the state of primary property location. The special rate rules under IC 6-2.5-2-3 for motor vehicle purchases when the vehicle is to be transported and titled outside Indiana do not apply to leases or rentals requiring recurring periodic payments. For more information on the special rate rules, please refer to Sales Tax Information Bulletin #84, available online at in.gov/dor/resources/tax-library/information-bulletins/sales-tax-information-bulletins/. In most periodic leases, the sales tax will be due to the state shown on the lease contract as the state where the motor vehicle or trailer will be licensed for highway use. This is commonly the home state address of the lessee. Leases Without Periodic Payments For a lease or rental that does not require recurring periodic payments (one lump sum payment), the payment is sourced the same as a retail sale (see Sales Tax Information Bulletin #28S, available online at the link above). Thus, a lease which requires the entire lease to be paid in one lump sum payment (generally at the time of lease inception) shall be treated the same as a retail sale and the entire amount received upon the lease shall be subject to the Indiana sales tax. Indiana sales tax will be due on the entire lease if the lessee takes physical possession and control of the leased vehicle within Indiana, regardless of state of residence of the lessee or location where the vehicle will be primarily located, registered or licensed. However, the rate provisions and procedures set forth under IC 6-2.5-2-3 for sales to nonresidents applies. Again, please refer to Sales Tax Information Bulletin #84 for further discussion on the application of the special sales tax rate. DEALER/LESSOR RESPONSIBILITIES FOR LEASES SOURCED TO INDIANA Customers should understand that when a vehicle is leased there are two separate, but related, transactions. The dealer “sells” the vehicle to a leasing or finance company and at the same time originates a lease arrangement between the leasing company or financial institution (the lessor) and the customer (lessee). NOTE: It is understood that in some instances the dealer does enter into a lease with the customer and subsequently assigns that lease to a third-party lessor. Such an arrangement does not change the guidance in this bulletin. If a vehicle or trailer lease is negotiated through a registered Indiana dealer, the dealer, acting as an agent for the lessor, must collect Indiana sales tax on all capital cost reduction payments made upon lease origination. Taxable capital cost reduction payments include such items as initial cash down payments, manufacturer’s rebates, equity in non-owner trades (trade value allowed even though trade-in is not titled in new lessee’s name) and first month’s lease payments. The lease document shall indicate the taxability of all initial lease origination payments on which the Indiana sales tax is assessed upon lease origination. The dealer will remit all sales tax collected on taxable capital cost reductions and lease origination payments. The lessor will report all lease income subject to the Indiana sales or use tax through INTIME beginning with the first monthly payment and shall make timely remittance of all sales or use taxes collected as a lessor. The lessor must be registered with the department as a Registered Retail Merchant. If the lessee claims an exemption and tax is not collected by the dealer or lessor, the statement at the bottom of Form ST-108E must be completed indicating the reason exemption is claimed and must be signed by the lessee. When a lessee claims an exemption on Form ST-108E, the dealer or lessor must retain a completed exemption certificate in the lessor’s records to document the exempted lease. Title applications on the sale by a registered dealer to the lessor without a Form ST-108E, completed by the dealer/lessor, will not be accepted by the Bureau of Motor Vehicles. Exemption number 5 must be indicated as the reason for exemption. TAXABLE LEASE AMOUNTS A lease of tangible personal property is a retail transaction pursuant to IC 6-2.5-4-10. As such, each lease and each individual lease payment is a retail unitary transaction pursuant to IC 6-2.5-1-1 and IC 6-2.5-1-2. The retail unitary transaction consists of all elements of the capitalized cost of the lease. In a retail unitary transaction, sales tax is imposed on the "gross retail income" received by the retail merchant in a sale or lease. IC 6-2.5-1-5 defines gross retail income for sales tax purposes to include the total gross receipts, of any kind or nature, received in a retail transaction by a retail merchant. The taxability of the gross retail income associated with leases is covered in Sales Tax Information Bulletin #42, available online at in.gov/dor/resources/tax-library/information-bulletins/sales-tax-information-bulletins/, There are types of charges, consideration, or discounts that are exceptions to the definition of gross retail income, which would then reduce the amount subject to sales tax. Below are exceptions to the application of sales tax to amounts due at lease origination. Since each lease payment is a separate retail unitary transaction, sales tax is always imposed on the full amount of the lease payment except in only two very limited circumstances. Those two circumstances are in cases where there is negative equity, and where credit is given for sales tax paid to another state on the full purchase price or capitalized cost upon origination. These exceptions are outlined at the bottom of this section. A manufacturer’s rebate based upon the lease of a vehicle is not deductible for Indiana sales tax purposes. For Indiana sales tax purposes, a rebate paid to the lessor is deemed to be “gross retail income” and thus is not deductible from the amount subject to Indiana sales tax. Sales tax is based upon retail income received by the lessor, not amounts paid by the lessee. It does not matter if the lessee has the option of receiving the rebate in cash, or assigning the rebate to the dealer/lessor to be applied as a capital cost reduction on the lease of a vehicle. The character of the rebate remains taxable. In either situation, the total amount of gross retail income received by the lessor is identical. A manufacturer’s price reduction is considered deductible for sales tax purposes because the manufacturer is actually reducing the selling price of the vehicle. The lessor does not receive the amount of the price reduction as consideration for the lease. A dealer’s price discount is also considered deductible in determining the amount on which sales tax is charged. The selling price is reduced by the dealer’s price discount. The lessor does not receive the amount of the price discount as consideration for the vehicle lease. All types of discounts, regardless of the terminology used to describe the price adjustment, are either taxable or exempt based upon whether the lessor receives “gross retail income” for the sale or lease of a vehicle. Like-kind exchanges are eligible for a deduction from gross retail income. The deduction for a trade-in allowance applies only to “like-kind exchanges” in which the motor vehicle or trailer to be traded in is owned and titled in the name of the customer. A like-kind exchange means a motor vehicle traded for another motor vehicle or a trailer traded for another trailer between two persons. A trade-in of a motor vehicle for a trailer is not a “like-kind exchange” and is not deductible in the calculation of the amount of the taxable gross retail income received by the dealer. Similarly, exchanges of motorcycles for motor vehicles and similar trades are not like-kind exchanges. The persons making the exchange must each own the property prior to the exchange. If there are more than two persons involved in the exchange, then it does not constitute a “like-kind exchange.” For example, if Person 1 sells their vehicle to Dealership A and immediately uses the funds to buy another vehicle at Dealership B, this would not constitute a “like-kind exchange”. A married couple will be treated as owning the property as a unit, rather than individually. If the vehicle being exchanged is in one spouse’s name and the newly purchased vehicle will be in the other spouse’s name, the couple will be treated as one person for the purposes of constituting a like-kind exchange. In order to validate that they are a married couple, they will need to provide a copy of their marriage license to the dealer confirming that they live at the same address. Further, to constitute a like-kind exchange, there must be a reciprocal exchange of like-kind vehicles as part of a single transaction. If cash, property of unlike kind, or credit is given by the dealer to the purchaser to use towards a future purchase, this will not constitute a reciprocal, like-kind exchange. The future purchase of a vehicle would be considered a separate transaction, and the cash, credit, or unlike kind property received by the purchaser from the previous transaction will not reduce the gross retail income of the future purchase of a vehicle. Non-like-kind exchanges are merely another form of a payment to the dealer and do not reduce the dealer’s gross retail income. Note: one exception to the general rule that a motor vehicle traded in for a trailer does not constitute a “like-kind exchange” is when a motorized recreational vehicle is traded in for a non-motorized recreational vehicle. In such a case, the department considers the motorized and non-motorized recreational vehicles to be like-kind. For further clarification regarding like-kind exchanges, please refer to Sales Tax Information Bulletin #92, available online at in.gov/dor/resources/tax-library/information-bulletins/sales-tax-information-bulletins/. The equity from a like-kind exchange is deductible from the taxable gross retail income for Indiana sales tax purposes. To be an exempt trade, the vehicle traded-in must be owned and titled in the name of the customer. The equity is deductible from the taxable gross retail income for sales tax purposes. Equity is defined as the gross trade-in value less any encumbrance (lien) on the trade. Negative equity from a traded-in vehicle is deductible from the taxable gross retail income for Indiana sales tax purposes. Negative equity is the amount of encumbrance or lien owed on a vehicle in excess of the gross trade-in value of the vehicle. The amount of negative equity built into a series of lease payments is deductible evenly over the life of the leased vehicle. Such amounts would normally be taxable since they are included in the capitalized cost of the lease. However, such amounts would not be taxable in a comparable sale where these amounts are rolled over into a new loan. This is similar to the treatment of amounts received in a like-kind exchange. These amounts are lease payments, but similar amounts are not taxable on a vehicle purchase and thus have been exempted in a comparable lease transaction. TAXABLE LEASE EXAMPLES NOTE: The examples below assume vehicle primary property location is Indiana (T=Taxable; E=Exempt). New Vehicle Lease – Customer Trade is a Vehicle and is Titled in Customer’s Name