Because states generally impose their sales taxes on retail sales of tangible personal property, you may be thinking that you can reduce your sales taxes by leasing property instead of purchasing it. If so, think again. Although there are many benefits to leasing your equipment and other business assets, avoiding sales taxes is not really one of them. With the exception of Illinois, all the states that impose general sales taxes have closed this potential loophole by defining "retail sales" to include leases or by separately taxing rental charges at the same rate as ordinary sales transactions.
The effect of treating a lease as a retail sale is that each rental payment may be treated as a separate sales transactions upon which tax may be due. In most states, however, lessors can avoid the obligation to collect or pay tax on the rental payments by electing to pay the sales tax upon their acquisition of the leased property.
In some cases, a lease is used to effectively finance the lessee's purchase
of the leased property. Because such financing
leases are considered for tax purposes to be conditional sales, sales tax
must be paid in its entirety at the inception of the lease rather than as the
rental payments are made.