New Jersey officials are invoking a state law regulating the purchase and sale of automobiles to prevent Tesla Motors, a California-based electric car company, from operating stores in the state that effectively sell cars directly to the public. Laws in New Jersey and at least forty-seven other states prohibit auto manufacturers from selling cars themselves, instead requiring them to sell through franchised dealers. New Jersey adopted amendments to an administrative rule to make it clear that Tesla does not qualify as a dealer under state law. The rule change could be construed as good for New Jersey businesses, since it arguably benefits locally-owned or -managed car dealerships. It has also, however, incurred the anger of Tesla and other major companies.
Tesla Motors, based in Palo Alto, California, currently offers the Model S, a fully-electric luxury sedan, for sale through its website. It previously sold an electric sports car model called the Roadster. A Model S sells for around $69,000, so its retail appeal is selective. Rather than sell the cars through dealerships, Tesla operates stores around the country that reportedly act as showrooms. Consumers can learn about the cars there, but all actual purchases take place via the internet. Many states have successfully argued that the showrooms effectively serve as retail stores owned and operated by Tesla, which violate state law.
New Jersey law requires a dealer’s license in order to sell motor vehicles to the public. NJ Rev. Stat. § 39:10-19. All motor vehicle sales must take place through dealerships that have a franchise agreement with a manufacturer, NJ Rev. Stat. § 56:10-27, and manufacturers are expressly barred from owning or operating their own dealerships. NJ Rev. Stat. § 56:10-28. The state has argued that Tesla cannot, under state law, operate retail stores or dealerships directly, nor may the company operate them through a subsidiary.
The rule change affecting Tesla, PRN 2013-138, amended the New Jersey Motor Vehicle Commission’s Licensing Service regulations to clarify certain licensing procedures, including requiring documentation of the franchise agreement between the applicant and the car manufacturer. It also applies the physical requirements of licensed dealers, such as at least one thousand square feet of display space, to all sellers of new motor vehicles. The new rules are expected to require Tesla to shut down its three New Jersey showrooms, located in Paramus, Short Hills, and Springfield Township.
Laws protecting the auto dealer franchise system ostensibly protect the public by requiring sales to go through an intermediary who has extensive knowledge of the product, can guide customers through the buying process, and is independent of the auto manufacturer. It also serves to protect local or regional car dealerships from competition by national or international manufacturers. Tesla’s showroom model threatens local car dealers, according to groups like the New Jersey Coalition of Automotive Retailers. The company has stated that it may enter into franchise agreements with dealers in the future, but has no current plans to do so.
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