Stateline Story

State Laws Stand In Way Of Direct Online Car Sales

  • January 26, 2000
  • By Joseph Giordono(2)

LOS ANGELES -- When the world's two largest automobile manufacturers --General Motors and Ford--announced Internet partnership deals with two of the biggest names on the Internet--America Online and Yahoo-- at a Detroit car expo, many analysts said it took the car companies one step closer to offering the ultimate point-and-click shopping experience: buying a car online.

In spite of the e-commerce revolution and the recent trend of alliances between Internet shopping portals and big consumer companies, the automakers have run into a raft of state and federal laws that essentially prohibit consumers from being able to buy and take delivery of cars online. But several online auto companies are campaigning to amend the laws in California and several other states.

"You may shop online, you may get prices online, but you may not buy online. Automobiles are protected items and they are things the state has interest in. But there is quiet lobbying going on everywhere," said Jay Gorman, executive vice president of the California Car Dealers Association.

The web partnerships with the carmakers would create millions of dollars in advertising revenue for Yahoo and AOL. Visitors to the portals would be able to customize the sites to tell them when their vehicles need servicing, process and update auto loans, receive technical advice and connect them to their nearest Ford and GM dealers.

The automakers say that in addition to basic services, they will be able to offer voice-activated Internet connections in their vehicles within the next year.

While these features would undoubtedly be useful to consumers, the ultimate goal of the automobile companies is to create a direct online sales presence, said John Malone, an automotive analyst for Morgan Stanley.

In California, Texas and about two dozen other states, new cars must be purchased from a licensed dealer. Manufacturers are prohibited from direct selling. But car companies want to create and nurture relations with repeat customers who know what they want and have the wherewithal to make a purchase; at the same time, Internet companies are eager to create a new online automobile market similar to existing book and clothing sales sites.

"The Internet has changed the economic model, and we would like to be able to, with our dealers, offer a variety of Internet purchasing opportunities to the consumer, whether they be new or used cars or other services," said John Mecke, Ford's director of legislative affairs.

According to the National Conference of State Legislatures, each state has its own set of laws governing automobile sales. California law bars people from purchasing cars online and effectively requires that a consumer go to a dealership to buy a car.

California law also protects a car dealer from a new franchise opening up within 10 miles of its location, regulates advertising of car prices and purchase terms, and prevents manufacturers from owning dealerships near other dealers.

While these regulations appear straightforward, other states have created confusing restrictions and loopholes. In Indiana, a dealer in a city with a population of more than 110,000 but less than 120,000 must get state approval to move to a new location. In North Carolina, franchised dealers are exempt from state excise taxes, whereas non-franchised dealers are not.

But according to industry experts, car manufacturers are teaming up with online auto companies (who act mainly as brokers or referral services) to amend state dealership laws to allow for the sale of new cars online.

Internet car firms have created cooperative arrangements with dealers to conform with current laws. Autobytel.com Inc., in Irvine, California, for example, gets paid by car dealers for providing leads to potential car buyers instead of being paid a fee for each car sold.

Under that arrangement, Autobytel.com is allowed to operate in compliance with Texas law. Autoweb.com, however, provides it service by referring customers to car brokers, which is illegal under Texas law.

So far, attempts by the auto manufacturers to skirt the franchise laws have been unsuccessful.

When Ford tried to set up an online program last month to sell used cars held by its dealers in Houston, it was shut down by Texas regulators. They concluded that the program violated laws against manufacturers selling cars, even though dealers held the vehicles and set the prices. Ford has filed suit in federal court to overturn the decision.

That does not mean, of course, that all car dealers are following the law.

"We know that it's been happening under the table, and the question has been raised formally, so we're looking into it," said Tom Novi, chief of the licensing branch of the California Department of Motor Vehicles.