You should never finance an Alabama billboard  with a lease instead of a loan.  The State of Alabama has a punitive rental tax which applies to leases and rentals.  Here’s the Alabama tax law:

810-6-5-.09 Leasing and Rental of Tangible Personal Property. (1) The term “rental tax” as used in this rule shall mean the privilege or license tax levied in Section 40-12-222, Code of Alabama 1975. (2) Unless otherwise defined in this rule, the definitions of terms contained in Section 40-12-220 are incorporated by reference herein. (3) Rental tax is levied on each person, firm, or corporation engaged in the business of leasing or renting tangible personal property in an amount equal to 4 percent of the gross proceeds of the business except the rate of 2 percent shall apply to the gross proceeds from the leasing or rental of linens and garments, and the rate of 1 ½ percent shall apply to the gross proceeds from the leasing or rental of automotive vehicles, truck trailers, semitrailers, and house trailers. (Section 40-12-222)

What this means is that all rental payments (principal as well as interest) are subject to a 4% rental tax.  Loans aren’t treated that way.  Let’s assume that you are trying to decide whether to finance a $500,000 digital billboard with a 60 month lease or a 60 month term loan.  Let’s assume that the loan and the lease are both are priced at 12% interest.

• The loan will be payable in 60 monthly payments of $11,122.22.

•  The capital lease will be due in 60 monthly payments of $11,567 consisting of a loan payment of $11,122 plus a rental tax of $444.89.

• Payments on the loan will total $667,334 over five years consisting of interest payments of $167,334 and principal payments of $500,000.

• Payments on the capital lease will total $694,027 over  5 years consisting of interest payments of $167,334, principal payments of $500,000 and Alabama rental tax of $26,693.

The cost of the loan is 12%.  The cost of the lease is 13.74% due to the Alabama rental tax.

Choosing to lease a $500,000 digital billboard takes almost $27,000 out of your pocket over five years.

Insider’s take:  You need to study you’re state’s tax laws closely when deciding between loan financing or capital lease financing for your billboards.

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