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Tesla vs. the auto dealers of America

Electric car manufacturer Tesla Motors has a gallery in Tyson's Corner, Virginia, to show off its new Model S to local drivers.
A Tesla Model S electric sedan (REUTERS/Noah Berge)
A Tesla Model S electric sedan

Electric car manufacturer Tesla Motors has a gallery in Tyson's Corner, Virginia, to show off its new Model S to local drivers. The only problem is, no one in Virginia is allowed to buy one there.

Virginia law prohibits car manufacturers from selling through independent dealerships, and it isn't the only state to do so. According to the Chicago Tribune, 48 states prohibit or limit the direct sale of automobiles, thanks to long-established laws requiring car purchases to go through a licensed third party. This is a major problem for Tesla, a company which is trying to reinvent not only cars, but also how they are sold.

In America, the relationship between car manufacturers and dealerships is old and politically entrenched. "Automakers book cars as sold once they leave for the sales lots and in return provide the retailers with financing," writes Reuters' Antony Currie. "Over time, the practice has been enshrined in laws across the 50 states." With dealerships and dealership headquarters all across the country, their political clout is widespread.

"Local auto dealerships are often among the biggest generators of tax revenue," writes CNBC's Philip Lebeau. "For many legislators, the message is clear: protect the local auto dealers, and you protect the economy in your district."

Tesla is currently struggling with bans in North Carolina, Virginia, Texas, Minnesota, and New York. In Texas, which has two Tesla galleries of its own, employees "can't tell you how much the car costs. They can't offer you a test drive. They can't even give you their website address. And if you buy one, the car is delivered by a third party—in a truck that's not allowed to have Tesla markings," says the Austin American-Statesman.

Some state legislatures have passed laws specifically to target Tesla. The North Carolina state Senate recently passed a law forbidding sales not from franchised dealers  (the law was later dropped in the NC House). Tesla opened its first Colorado store in Denver, only to face subsequent state legislation saying it couldn't open any more.

New York introduced legislation earlier this month which forbids direct sales in the state and also keeps Tesla vehicles bought elsewhere in the country from being registered in New York.

“From the beginning, Tesla’s goal has been to catalyze the market for electric vehicles and selling through intermediaries at this stage of the company will not work,” Tesla Vice President Diarmuid O’Connell said in a statement. “If we are kept out of New York, it forestalls progress and defeats innovation.”

Faced with bans in several different states, Tesla CEO Elon Musk wants to fight this war on a larger front.

"If we’re seeing nonstop battles at the state level, rather than fight 20 different state battles, I’d rather fight one federal battle,” Musk told Automotive News in April.

Auto dealers claim that by allowing direct sales, they risk manufacturers coming in to the state and undercutting their business. Some have said that local dealers play too important a role in their communities to be bypassed. "It's a consumer protection," said Bob Glaser, head of the North Carolina Automobile Dealers Association. "A dealer who has invested a significant amount of capital in a community is more committed to taking care of that area's customers."

Tesla supporters say the auto dealers' excuses are as antiquated as the laws protecting them.

"Tesla deserves a chance to disrupt the sales-model status quo as much as it does industry design," writes Currie. "There’s no guarantee it will succeed. Politicians and the nation’s entrenched dealers should get out of the way and let the market decide."

Steve Chapman of the Chicago Tribune put the problem more simply: "It's about established businesses leveraging government power to enrich themselves."