Budget pressures on communities are growing. Here are timely answers for manufacturers and dealers about tax-exempt municipal leases and creative financing options, which can ease equipment procurement hurdles for government customers.
State governments and municipalities across the nation face mounting expenses, revenue concerns and, in some cases, dwindling reserves. The Pew Charitable Trusts estimates that at least 20 of the 25 most populated cities in the U.S. are dealing with budget gaps in fiscal 2026. These cities are not alone. Pew researchers noted that large metropolitan areas are contending with the same problems as state governments and other localities, including “rising costs, revenue sources struggling to keep up, reduced federal support, and increased fiscal and economic uncertainty.”
Against this backdrop, communities still must fund the equipment, vehicles and buildings needed to provide essential services to citizens. This presents an opportunity for equipment vendors, including original equipment manufacturers (OEMs) and dealers. They can increase sales by offering government organizations and other qualified entities the option of tax-exempt municipal leases. Vendors can also pave the way for faster sales through vendor payable accounts and creative financing strategies.
Baystone Government Finance provides these capabilities nationwide to manufacturers and dealers for qualified customers. We also meet with equipment vendors at events, most recently at the 2025 PWX conference sponsored by the American Public Works Association (APWA), and earlier this year at Equipment Finance Connect.
During our conversations, we often field questions about tax-exempt municipal leases, especially about how they work and what organizations and equipment are eligible. That’s because the term “tax-exempt municipal leases” can be misleading without a basic understanding of the funding. Not all tax-exempt organizations qualify for tax-exempt municipal leases, though many do.
In this case, “tax exempt” refers to the fact that the lender does not have to pay income tax on the interest income from the transaction. The lender, in turn, can offer lower interest rates to government agencies, public schools, public hospitals and certain nonprofits that qualify for tax-exempt financing – one of many benefits available through municipal leases.
State and local governments of all sizes use tax-exempt municipal leases to procure every type of essential equipment imaginable. Fire departments and other volunteer organizations that qualify use them, too.
Another financing option that generates questions from OEMs and dealers are vendor payable accounts (VPAs).
VPAs help vendors break through the impasse when customers say they must delay ordering equipment until funding becomes available their next fiscal year. Baystone can finance the equipment now – accelerating sales for vendors – and customers can wait until their new fiscal year begins or the equipment arrives to start making payments. VPAs can be useful for stimulating many types of equipment sales but they are especially so for assets experiencing long delivery delays such as fire trucks and ambulances.
You can learn more about tax-exempt municipal leases and vendor payable accounts in the following section.
Frequently Asked Questions about Tax-Exempt Financing
Our Baystone Government Finance team is available to answer individual questions from OEMs and dealers, but we thought it would be helpful to cover some of your most frequently asked questions in this blog.
What are tax-exempt municipal leases?
Tax-exempt municipal leases are an equipment financing option available to state, local and tribal governments, public schools, public hospitals and other qualified organizations in all 50 states. They help organizations procure the essential equipment and infrastructure needed to serve their citizens.
How do they work?
In most states, tax-exempt municipal leases are lease-purchase agreements. The organization that receives the financing (the lessee) makes installment payments on the equipment to the lender (the lessor) during the lease term. At the end of the term, the lessee owns the equipment.
Most municipal leases also have a non-appropriation clause, which means the lessee can end the agreement without penalties if funds are not available in later fiscal years. In most states, the non-appropriation clause exempts the lease obligation from the municipality’s debt limitations. Allowing more flexibility for future bond issuances.
Since a tax-exempt lease is a “net lease,” the lessee is responsible for maintenance, insurance, property taxes and operating expenses. That is, unless the lessee contracted with the equipment supplier to provide any of these services. In such cases, these expenses can also be included in the financing.
What are the benefits for equipment vendors and their customers?
The key advantage of tax-exempt municipal leases for OEMs and dealers is the ability to increase sales by offering this financing option to qualified customers.
For customers, tax-exempt municipal leases can be a preferred alternative to cash payments, bonds or operating leases or loans, depending on the situation. Municipal leases enable organizations to:
- Conserve capital for other uses where leasing is not an option.
- Improve cash flow.
- Structure flexible payments to meet budgetary needs.
- Benefit from reduced rates — averaging approximately 30 percent below commercial rates.
- Distribute the costs of an asset over its useful life.
- Avoid the need for voter approval or tax increases, in most jurisdictions.
What organizations qualify for tax-exempt financing?
States or political subdivisions such as cities, towns or counties can qualify for tax-exempt municipal leases. IRS Section 103 states that the organization must have at least one of three powers in order to issue tax-exempt obligations: the power to tax; police power; and/or the power of eminent domain.
Other organizations can be eligible for tax-exempt municipal leases through their relationships with states and political subdivisions. They include public schools, colleges and universities, special purpose districts for fire, water, parks, utilities and hospitals, along with agencies, authorities, boards and commissions. Volunteer fire companies that meet IRS criteria can qualify, as well.
What types of assets can be financed this way?
Assets financed through tax-exempt municipal leases must be equipment or real property used for essential, traditional government purposes. The type of assets permitted can differ depending on state laws and entity types.
In general, however, tax-exempt municipal leases can cover a long and varied list of essential equipment and real property. To cite some examples, they are being used to finance street sweepers, heavy-duty trucks and other public works equipment; water treatment equipment and infrastructure; police cruisers, ambulances, fire trucks and public safety gear; school computers, security systems and buses; medical imaging, surgical and laboratory equipment; heating, ventilation and air conditioning (HVAC) systems, lighting systems and roofs; and modular buildings, fire stations and gymnasiums.
Don’t government procurement laws vary?
Yes, they do, which is why it is important for equipment manufacturers and dealers to work with lenders that have experience providing tax-exempt financing for state and local governments in all 50 states. The lender should have the financing, legal expertise and documentation necessary to meet the requirements of each jurisdiction.
What are vendor payable accounts (VPAs) and how do they work?
VPAs are non-interest-bearing holding accounts that lock in financing for customers. They ensure that financing is approved, funds are secured and the interest rate is locked in while waiting for delivery and installation of the equipment. These accounts require only limited paperwork, and they enable customers to defer lease payments until their equipment is in place.
Where can I learn more about government financing?
- See our Tax-Exempt Municipal Leasing page for comprehensive information and a downloadable flyer.
- Visit our Equipment Financing for Schools page for information on tax-exempt financing for K-12 public schools, colleges and universities.
- See our Resources page for additional frequently asked questions.
- Talk to a member of our Baystone Government Finance team.
