Yahoo Finance Why you can't buy a Tesla in these states
It’s amazing that Tesla (TSLA) even exists. Before Tesla, the most recent successful American auto startup was Chrysler, over 90 years ago.
Tesla has survived the first hard part: designing beautiful, fast, high-tech electric cars that a lot of people want and love.
Now come all the other hard parts: pacifying investors, navigating legal problems, getting the cars delivered—and getting permission to sell them.
That’s right. In some states, Tesla is not allowed to open dealerships.
I live in one of them: Connecticut. Two years ago, I added myself to the waiting list for the Tesla Model 3. This summer, I finally picked it up—in New York. As I drove it back home over the state border, I wondered why Connecticut would want to hand over all the sales tax I just paid to a rival state.
Finding the answer turned out to be a long and winding road.
Where Tesla is banned
It’s hard to pin down exactly how many states truly don’t want Tesla to open dealerships. Sixteen states have laws on the books that would prevent that, but Tesla hasn’t challenged those laws yet in some of them. More on that in a moment.
Here are those states: Alabama, Arkansas, Connecticut, Iowa, Kansas, Kentucky, Louisiana, Michigan, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, South Carolina, South Dakota, and Texas.
Then there are nine states that limit the number of dealerships Tesla can open: Colorado (limit: one), North Carolina (one), Virginia (two), Georgia (five), Maryland (four), New Jersey (four), New York (five), Ohio (three), Pennsylvania (five). (These totals don’t count the “galleries” that Tesla has opened in some states, where you can see the cars and ask questions—but you can’t even discuss buying one.)
In a capitalist system, it might seem counterintuitive for a state to prevent a popular company from opening a store. Aren’t new businesses good? Don’t they generate property taxes and sales tax? Don’t they mean more local jobs?
Wouldn’t welcoming a big player in electric cars help these states with their environmental goals? (Connecticut’s government, for example, aims to lower emissions to 45% of 2001 levels by 2030.)
Don’t we want to support American manufacturing?
Answer #1: Franchise laws
The first reason for the state bans: Tesla insists on operating its own dealerships, rather than offering franchises (local dealerships, which buy the cars from the manufacturer) like those of GM, Ford, Toyota, Honda, and others.
“Existing franchise dealers have a fundamental conflict of interest between selling gasoline cars, which constitute the vast majority of their business, and selling the new technology of electric cars,” CEO Elon Musk writes on Tesla’s site. “It is impossible for them to explain the advantages of going electric without simultaneously undermining their traditional business.”
Tesla also points out that its prices are fixed, and its salespeople are paid primarily on salary, not commission. “Customers will never be rushed into a purchase, haggle over the price of the car, wonder if they could get a better deal across town, or puzzle over confusing add-on products, like GAP insurance or rust-proofing.”
“We think that it’s absolutely critical that we have a direct relationship with our customers,” Todd Maron, Tesla general counsel, told me. “We look at our stores as educational centers. There are all these questions people have; we view our salespeople as teachers who can patiently answer them.”
Back in the 1930s, the car companies established this system so that they could worry about making cars, and the franchises could worry about selling and repairing them.
Early on, though, the franchisees lobbied their state governments for protection. They feared, among other things, that the giant car companies could open up their own stores across the street, cut prices, and crush the franchise like a bug.
To prevent that kind of abuse, all 50 states passed “dealer franchise laws.” They protected the dealerships in various ways—including barring any car maker from selling directly to consumers.
Those laws didn’t foresee the modern era. What they meant, of course, is that “no car company that has franchises can sell directly to consumers.”
They weren’t even thinking about companies that don’t have franchises, because there weren’t any at the time.
Over the years, Tesla’s legal team has gone from one state legislature to another, pointing out how that rule has become outdated, and suggesting that it get changed. In some cases, they succeeded.
In others, though, Tesla is running into a tougher obstacle.
Answer #2: Protectionism
Technically, the states’ elected officials are keeping Tesla out. But they’re doing so at the request of another group: Other car companies’ franchise owners.
Traditional car dealers make very little money from selling new cars. “The vast majority of their income comes from service,” says Bruce Becker, president of the Electric Vehicle Club of Connecticut. A National Automobile Dealers Association spokesperson told The New York Times back in 2015 that dealers make three times the profit from service as they do from selling new cars.
But an electric car has no engine and no transmission. It has no spark plugs, fan belts, air filters, timing belts, or cylinder heads. It never needs oil changes, tuneups, or emissions checks. Your brake pads go years without needing replacement, too, since just lifting your foot from the accelerator slows the car down (by recharging the batteries).
That, Becker says, is why car dealers “see the electric car as an existential threat to their service business. It’s revenue that these car dealers don’t want to give up.”
“Their concern is that if [the direct-to-customer dealership model] starts to take hold and become a popular structure, then GM or Ford might decide they want to go direct as well, and the dealerships would be cut out,” Connecticut state senator Toni Boucher explains. “They’re threatened personally.”
In my state, “they” means CARA (Connecticut Automotive Retailers Association) and its president, James Fleming. He’s the man behind the 2015 website TeslaCrash.com (now defunct), whose headlines included “Owning A Tesla Is Awesome, Until You Get In An Accident”; “Person Buys Tesla, Person Immediately Crashes Tesla”; and “Bank of America is predicting a massive Tesla collapse.”
Connecticut has considered letting Tesla enter the state every legislative session since 2014; each time, Fleming has successfully shut the effort down. But he disputes that the goal is to protect the dealers’ service-center profits.
“There are all sorts of profit centers in a dealership, and parts and service are just one of them,” he says. Instead, he says, he’s opposing Tesla dealerships to protect you, in case you buy a lemon.
“Most states have [a Lemon Law],” he says. If your car has a big problem that persists after several attempts to fix it, “the dealer and the customer are on one side of the table, and the manufacturer on the other side of the table. It’s anti-consumer to set up a system that allows a manufacturer to be your only option when you’re trying to get a vehicle under the Lemon Law. And that’s what the direct-sales system does, whether it’s Tesla or anybody else.”
[Update: “I am a lemon-law lawyer. The argument that these anti-Tesla laws are pro-consumer because of the lemon law is NONSENSE,” writes Michigan attorney Steve Lehto. “The lemon laws (of 50 states) require the manufacturer to buy back a qualifying car. The dealer is not involved in the transaction, other than they are (usually) where the car is returned. I challenge anyone to show me a single word in any state’s lemon law that defines a role for a dealer in the buyback process that would put them in an adversarial position to the manufacturer.”]
The lobbying effort
No matter what their real motives, the dealers are fighting back hard.
“The dealers have embarked on a sophisticated public relations/advertising campaign each session when a Tesla direct-sale bill is being considered,” says Connecticut State Representative Jonathan Steinberg. “They argue that thousands of jobs would be lost if it was allowed, although they provide no evidence of that happening elsewhere.”
“They’re the legislators’ best friends,” says Becker of the EV Club. “What some dealers do is, they’ll actually man the campaigns. They’ll have a campaign headquarters in their dealerships. There’s one dealer who’s actually running the campaign for someone who’s running for governor.”
Becker says that CARA has even threatened to run candidates against anyone in office who doesn’t favor their interests. (“That is bizarre. That would never happen,” says Fleming. “That’s insane.”)
Similar efforts are at work in other states. In Arizona, for example, one of the state’s most lavish political contributors is a car dealer. According to AZCentral.com, he contributed $150,000 to get Governor Doug Ducey elected—and was one of five people to serve on Ducey’s inaugural committee.
And in Michigan—home of America’s biggest gas-car manufacturers—it’s even worse.
Michigan’s existing law originally said, “A manufacturer shall not…sell any new motor vehicle directly to a retail customer other than through its franchised dealers.”
The magic word there is “its,” meaning “the manufacturer’s franchised dealers.” So according to this law, Tesla should be OK—it has no dealers.
But then, according to a Cato Institute account, “In October of 2014, bowing to the pressure of auto manufacturers and car dealers, Michigan state senator Joe Hune, whose wife, Marcia Hune, is a registered lobbyist for the firm that represents Michigan auto dealers, inserted a late amendment to Michigan H.B. 5606.”
The change was eliminating a single word: “its.”
The resulting sentence now says, “A manufacturer shall not…sell any new motor vehicle directly to a retail customer other than through franchised dealers.”
“This amendment was introduced on the eve of the adjournment of the legislature, and it was passed with no debate, no legislator input, and no committee process,” the Cato report goes on. “Many of the legislators who voted for the Hune amendment claimed to not even know the purpose of the amendment or that it was aimed at taking Tesla out of the Michigan market.”
In June 2016, Tesla’s general counsel, Todd Maron, met with Michigan’s dealer association, car manufacturers, and state Michigan legislators, to discuss a compromise that might let Tesla sell and service its cars in Michigan. At that meeting, Tesla learned just how much sway the car industry has over the lawmakers.
One Michigan legislator, Jason Sheppard, put it to Maron this way: “The Michigan dealers do not want you here. The local manufacturers do not want you here. So you’re not going to be here.”
Tesla has now filed suit against the state, demanding a jury trial.
Do gas-car dealers want to sell electrics?
CARA’s James Fleming has an idea for Tesla. “We’ve told Mr. Musk and his representatives for five years now that we would like him to try the franchise system here in Connecticut,” he says. “See if it works.”
Tesla says that will never happen—because gas-car franchise owners just aren’t good at selling electric vehicles. Some are uninformed, some actively try to talk you out of them, and all have financial incentives to steer you into a gas car.
Consumer Reports, for example, sent 19 secret shoppers, posing as potential EV buyers, to 85 dealerships in four states in 2014. Few salespeople could answer questions about battery life and warranties; many didn’t know about the tax incentives available in their states. One Toyota salesperson said, hilariously, that the Prius Plug-in requires a battery replacement “every couple of years.” A Ford sales manager told one shopper that there’s no such thing as an electric Focus.
And 41% of dealerships tried to talk the shoppers out of buying an electric car.
The Sierra Club performed a similar experiment in 2016, involving 174 secret shoppers visiting or calling 308 dealerships in 10 states. The results were similar. Fourteen percent of the dealerships had electric cars in stock—with dead batteries. One-third of the time, the salesperson didn’t mention the federal and state EV rebates, which can total $10,000 or more. On 42% of the lots, the electric cars weren’t even visible without some hunting.
(My own experience at a Honda dealership in Milford, Connecticut, was similar. The salesperson had one Clarity in stock, but its battery was dead, and “the technician who knows how to plug it in is gone for the night.”)
“There have been many, many studies where secret shoppers have gone into franchised dealers and asked to test-drive the EV,” Tesla’s Todd Maron says, “and the dealer has literally been hiding them behind curtains, doing everything they possibly can to not show them to the customer. It’ll take too long for them to do the sale, there are too many questions, it’s too unfamiliar.”
Car-dealership lobbyist Fleming takes issue with the assertion that dealerships don’t want to sell electric cars.
“They say dealers don’t want to sell these,” he says. “That’s just a ridiculous argument when you consider that when a dealer puts a vehicle on their lot, they’ve bought the car. They own it. They have carrying costs associated with that. They need to move the vehicle! Whether it’s an EV or an internal combustion or a fuel cell vehicle, they gotta move those vehicles off the lot.”
Furthermore, he says, 44 other companies make electric cars, and their franchisees are selling them just fine. “They’re selling Bolts, and Volts, and Volvo’s talking about going 100 percent EV within the next five to ten years. So I don’t think there is much legitimacy to that argument.”
Where it leaves us
Each side swears that it will win.
“If Tesla doesn’t straighten their act out, Tesla may just go away,” Fleming says. “Or somebody is gonna buy them and they’re going to acquiesce to the franchise system.”
In Connecticut, the battle continues. “You’ve got these entrenched special interests that have really pushed hard, and they seem to be more entrenched every year, because they see the risks to them personally,” Senator Boucher says.
But, as EV Club president Bruce Becker points out, banning Tesla from a state “is not a good long-term strategy. It’s not stopping people from buying Teslas—it’s just sending them out of state to do it.”
“The reality is, we’ve put no dealers out of business,” says Tesla’s Maron. “In all the other states in the country, in all the other countries where we operate, we’ve always been able to operate alongside dealers selling other cars. It’s just competition, and it’s completely normal.”
That, he says, is why Tesla has been successful getting the dealer-franchise laws changed in several states, so that Tesla can open at least some stores.
“It’s only a matter of time, either through the courts or through the legislature, that we’ll get those laws changed,” he says. “We’re not going to give up on this issue, ever. It’s so fundamental to who we are.”
Correction: As originally posted, this story noted that Tesla-banning states miss out on the sales tax they might earn. In fact, where you pay sales tax for out-of-state cars varies by state. Connecticut, for example, only gets the difference between the out-of-state rate and its own.
David Pogue, tech columnist for Yahoo Finance, welcomes comments below. On the Web, he’s davidpogue.com. On Twitter, he’s @pogue. On email, he’s poguester@yahoo.com. You can sign up to get his stuff by email, here.
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