The Consequences of Connecticut’s Tesla Ban

, policy analyst | March 2, 2017, 12:38 pm EST
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At Tesla’s facility in Greenwich, Connecticut, you can take a look at Tesla cars. You can talk to representatives about electric vehicle technology, and learn how to install charging equipment. You can buy swag featuring the Tesla logo.

But you cannot buy a car. You cannot test drive a car. You cannot talk to a Tesla representative about pricing or financing. You cannot have your car serviced.

This is not a Tesla store.

Tesla’s Greenwich facility, you see, is an “educational gallery,” and not a store. It has to be an educational gallery, because Tesla is legally prohibited from operating a Tesla store in Connecticut. This is due to Connecticut’s dealer franchise laws that require all cars to be sold by independently licensed dealers rather than manufacturers.

If you are a Connecticut resident and you want to buy a Tesla, the first step is to go online. Through Tesla’s web site you can order a car and put down a deposit. The car is then delivered to the nearest store; for most Connecticut consumers, that means a store in White Plains or Westchester County, New York. Customers must then travel to New York where a sales representative can complete the sale.

As this is officially a New York transaction, sales of Teslas to Connecticut residents thus create New York jobs, require payment of New York sales tax, and contribute to the New York economy.

Connecticut’s dealer franchise laws are a major impediment, not only to Tesla, but to other companies that are looking to sell electric vehicles independent of the traditional dealership model, including Elio and BYD. In this post, I want to look at the arguments raised for and against these dealer franchise laws. In particular:

  • What is the justification for laws banning Tesla stores?
  • Do dealer franchise laws benefit consumers?

Spoiler alert: the arguments raised in support of banning direct manufacturer sales are poor.

What is the justification for laws banning Tesla stores?

As I discussed in my last blog post, the ban on Tesla sales is an unintended consequence of laws originally designed to protect auto dealers from unfair competition with automobile manufacturers.

Perhaps recognizing that the protection of car dealerships is not the strongest foundation to build broad public support for your policy, in recent years auto dealers have reinterpreted dealer franchise laws—laws that were explicitly passed to protect dealers—as intended to protect consumers.

The National Automobile Dealers Association for example, defends dealer franchise laws by citing a long list of ways in which consumers benefit from the dealer franchise system. Independent auto dealers create more cutthroat price competition than you’d have in a system dominated by manufacturers. Independent auto dealers are more likely to stick around and be able to service vehicle models even if the manufacturer closes down.

This reading of the law makes little sense.

By its very nature, the prohibition on direct manufacturer sales is a restriction on consumer choice—dealer franchise laws take away the option of a consumer purchasing directly from a manufacturer. If consumers prefer to buy cars from independent dealers, then there is no need for a law to force consumers to do so. The question is whether consumers should be allowed to do anything else. Indeed, all around the world independent dealerships continue to thrive in jurisdictions without laws banning direct sales by manufacturers.

Another problem with NADA’s argument: most independent economists believe that dealer franchise laws impose costs on consumers to the benefit of dealers.

Do dealer franchise laws benefit consumers?

Dealer franchise laws belong to a category of occupational licensing regulations that have been the subject of withering criticism over the past few decades by social scientists, including economists and public choice theorists, such as the recently departed Kenneth Arrow. At their best, occupational licenses act as a way of ensuring that businesses meet reasonable quality and safety standards. At their worst, occupational licensing can by captured by special interest groups and turned into an artificial barrier to entry for new businesses, stifling innovation and rewarding entrenched interests.

A recent open letter from 70 major economists to New Jersey Governor Chris Christie on this issue stated the mainstream economic position bluntly:

There is no justification on any rational economic or public policy grounds for such a restraint of commerce. Rather, the upshot of the regulation is to reduce competition in New Jersey’s automobile market for the benefit of auto dealers and to the detriment of its consumers. It is protectionism for auto dealers, pure and simple. . . . In sum, we have not heard a single argument for a direct distribution ban that makes any sense. To the contrary, these arguments simply bolster our belief that the regulations in question are motivated by economic protectionism that favors dealers at the expense of consumers and innovative technologies.

Independent studies that have looked at the economic impacts of dealer franchise laws generally show that by restricting new distribution methods, these laws impose costs on consumers; one study shows that they increase average vehicle costs by 8.6 percent, or $2,225 per vehicle. For all these reasons, the Federal Trade Commission, along with most independent consumer organizations, including Consumer Federation of America and Consumers for Auto Reliability and Safety support allowing direct sales from manufacturers.

Connecticut should lift the ban on direct manufacturer sales for EVs

Unless you are an independent auto dealer yourself, there is simply no good reason for Connecticut to continue to prohibit Tesla from operating in the state.

The dealer franchise laws that ban direct manufacturer sales are antiquated laws designed to deal with economic circumstances that are not relevant to Tesla. The primary economic impact of these laws is to enrich dealers at the expense of consumers. The Tesla ban acts as an unnecessary impediment to achieving the state’s goals for vehicle electrification and pollution. And the most immediate practical impact of dealer franchise laws is to frustrate and irritate Connecticut residents, while depriving the state of economic activity and tax revenue.

This law should be changed.

Posted in: Vehicles

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  • Randy Aey

    You all know somebody is paying somebody to keep antiquated laws like this on the books. Look for who stands to gain by keeping this law around, look who they meet with at the legislative office’s, and of course, we all know who the losers are…John Q. Public!!! Just another reason Connecticut is dying, and people are leaving.

  • Jeff Świerbutowicz

    Pretty sure Connecticut still gets the sales tax since the car is registered in Connecticut.

    • Chris D’Antonio

      Nope, you don’t pay CT sales tax as long as you prove it was paid in a different state (and above a certain %). You pay registration fees but CT still misses out on the big taxes.

  • Flydog57

    I’m not a dealer (nor related to one, nor do I own any stock in any company in the automotive business). But…
    This did not address the argument that I’ve heard about imposing independent dealership restrictions. If there were no restrictions, and manufacturers decided to get into the retail business, and decided to be aggressive about it, they could easily force dealers out of business if they wanted to (they control the prices the dealerships pay, and they’d control the prices that consumers would pay from their manufacturer-owned stores).
    Once they drove all the independent dealerships out of business, there would be no inter-dealer competition (if you live in a state that allows Tesla to operate stores, it’s impossible to find a Tesla at less that the Tesla-established price).
    The author points out that states that allow manufacturers to sell cars haven’t seen any problems. It would have been interesting if he’d pointed out the potential problems and discussed if they had occurred, or, if not, why they didn’t[

    • Daniel Gatti

      I thought about getting into this point in more detail, but I didn’t want to derail the main thrust of the post. But thanks for the opportunity to spell out my position on this more specifically.

      One major point here is that most major manufacturers have very little interest in getting involved in direct to consumer sales. There are a lot of reasons for that, the biggest one being that test drives and showrooms are an inherent part of the automotive business (96% of all auto customers want to test drive a vehicle before they buy it) and very few manufacturers have any interest in taking on the expense of building those things themselves when they can outsource it to an independent dealer instead.

      I do think that there is a legitimate concern addressed by these laws as applied to a manufacturer who is directly competing against their own local dealer. For example, it would be quite unfair to have customers go to a local independent Ford dealer, test drive a Ford, and then go home and buy the car directly off of the Ford website. So I think keeping these laws in place for those situations makes sense.

      The problem is applying those laws to a company like Tesla, that has no independent dealers to cheat and who, I think, has a good argument for why they don’t want to use the independent dealer system.