Why Direct-to-Consumer Car Sales Are Illegal in Most States

In most U.S. states, direct-to-consumer car sales are illegal because state franchise laws require new vehicles to be sold through independently owned dealerships rather than by the manufacturer itself. These laws exist in nearly every state, were originally written to protect local dealers from the automakers they depend on, and now sit at the center of a long fight involving Tesla, Rivian, Scout Motors, the Federal Trade Commission, and the dealer lobby.¹

Why the Bans Exist in the First Place

The franchise model goes back to the early auto industry, when manufacturers needed local entrepreneurs to invest in showrooms, hire mechanics, and build customer relationships across thousands of towns. Those early contracts favored the automakers heavily. A manufacturer could cancel a dealer’s franchise at the end of any model year, often without cause, leaving the dealer stuck with a building full of unsellable inventory.

Dealers organized and went to state legislatures. The earliest laws required manufacturers to show “good cause” before terminating a franchise. Over the decades, those protections expanded into bans on manufacturer-owned stores, territorial exclusivity for existing dealers, and outright prohibitions on direct sales. When internet commerce began to look like a way for manufacturers to bypass dealers entirely in the late 1990s, roughly a dozen states strengthened or passed new laws specifically targeting direct online sales.¹

The underlying logic is investment protection. A dealership requires millions of dollars in real estate, equipment, and inventory, often financed over many years. If the manufacturer could open its own store across the street and undercut the dealer on price, those sunk investments would evaporate. Franchise laws prevent that by making it illegal for the manufacturer to compete directly with its own franchisees.

What the Laws Actually Prohibit

A typical franchise agreement gives a dealer the exclusive right to sell a particular manufacturer’s vehicles within a defined geographic territory. The manufacturer supplies the cars and sets suggested retail prices; the dealer handles the sale, financing, trade-ins, and service.¹

State law then layers restrictions on top of that private contract. The bans on direct sales are part of a broader set of rules that also bar manufacturers from owning dealerships, regulate how new dealers can enter a market, and control how existing franchises can be terminated.¹ Penalties for a manufacturer that sells around a dealer vary but can include fines, license revocation, court injunctions, and in some states loss of the right to do any business in the state at all.

Which States Ban Direct Sales and Which Don’t

There is no federal law governing this. Every state writes its own rules, and the variations are significant.¹ Roughly 14 states, including Alabama, Texas, Kansas, and South Carolina, maintain outright bans on direct manufacturer sales. Another nine or so allow direct sales but cap the number of stores a single manufacturer can operate. New York caps manufacturer-owned stores at five, Maryland at four, Ohio at three, and Mississippi at one. The remaining states either permit direct sales with various licensing requirements or have carved out exemptions specifically for electric-vehicle makers.

That patchwork creates real friction. A buyer in one state can walk into a Tesla store and drive away with a car. A buyer twenty miles across a state line may have to order online and take delivery from out of state, then handle their own title, registration, and use tax with their home state’s DMV.

How Tesla, Rivian, and Scout Sell Anyway

Tesla pioneered the modern playbook, and newer entrants like Rivian, Lucid, and Scout Motors use variations on the same approaches. The specific workaround depends on the restriction in each state.

Gallery or showroom model. In states that ban direct sales but allow manufacturer-owned display spaces, companies run “galleries” where you can see and sit in a vehicle but cannot negotiate a price or sign a purchase agreement on-site. The actual sale is processed online through a state where it is legal.
Online ordering with out-of-state delivery. In states with outright bans, the manufacturer takes the order through its website and delivers from a state where direct sales are permitted. You handle your own title, registration, and use tax.
Operating within store caps. In states that limit the number of manufacturer-owned locations, companies open the maximum allowed and push the rest of their sales online.
Tribal land. Tesla opened a store on sovereign Mohegan tribal land in Connecticut, sidestepping the state’s ban. This works only in narrow circumstances where tribal sovereignty applies.

Some states have gone further and written explicit exemptions for EV-only manufacturers that have never had franchise relationships to protect. Washington state, in its 2025-2026 session, passed legislation allowing a manufacturer to own and operate dealerships if it is incorporated in the United States, has never franchised, operates at least one service facility in the state, and exclusively produces battery electric vehicles with at least 300 registrations in the state before January 1, 2026.² Exemptions like this are tailored to leave legacy franchise relationships untouched while giving newcomers a path to market.

What the Bans Cost Buyers

A Federal Trade Commission study estimated that state franchise laws increase new car prices by roughly 6 percent. Other research on government-mandated restraints in car distribution has found the same pattern of higher prices, higher costs, shorter dealership hours, and reduced vehicle sales. When the European Union studied the effects of manufacturer territorial exclusivity, it reached a similar conclusion that removing exclusive territories would lower prices.

Dealer documentation fees add another layer, varying widely by state. Some states cap them; others do not. The range runs from under $100 to nearly $1,000 depending on where you buy. None of those fees exist in a direct manufacturer sale.

What Federal Regulators Say

Both the Federal Trade Commission and the Department of Justice have come out against blanket bans on direct sales. FTC staff has called the prohibitions “an anomaly” in the American economy, where virtually every other industry lets manufacturers choose how to distribute their products. In most markets, the FTC said, “the market polices inefficient, unresponsive, or otherwise inadequate distribution practices on its own.”³

The FTC drew a distinction the dealer lobby tends to blur. Protecting dealers from genuine manufacturer abuse, like unfair franchise termination, is a legitimate goal. That does not justify banning all direct sales by all manufacturers, especially those that have never had franchise relationships with dealers in the first place.³ The DOJ’s Antitrust Division concluded that the economic arguments for the bans “are not persuasive” and compared the potential shift to what Dell did in personal computers by cutting out retail middlemen.¹

The Scout Motors Fight and What Comes Next

The most closely watched legal fight involves Scout Motors, a Volkswagen subsidiary that announced plans to sell its electric SUV and pickup directly to consumers and began accepting $100 deposits in late 2024. The California New Car Dealers Association sent a cease-and-desist letter arguing that Scout’s ties to Volkswagen, which has thousands of franchised dealers, make the direct model illegal under California law, and threatened immediate legal action if Scout did not stop collecting deposits from California residents.

Volkswagen dealers in New York and Connecticut filed a class-action lawsuit in early 2026 alleging that Volkswagen breached its franchise contracts by letting Scout sell directly. A federal judge ruled that the California suit will proceed. The unresolved question is whether a legacy automaker can launch a separate brand outside its franchise network, and the answer will shape how every traditional manufacturer approaches direct sales for years.

The broader trend favors loosening restrictions, but the pace is slow. Every legislative session, a handful of states consider bills to allow or expand direct sales, and the dealer lobby mobilizes against most of them. The National Automobile Dealers Association maintains that the franchise system “remains the most efficient and trusted way to sell, service, and finance vehicles,” a position the FTC and DOJ have explicitly rejected. Federal legislation to override state bans has been proposed at various points without gaining serious traction. Dealers are embedded in local economies and state politics in ways manufacturers are not; a single congressional district can hold dozens of dealerships employing hundreds of people, which makes voting against dealer interests expensive for any legislator.³

1
U.S. Department of Justice. Economic Effects Of State Bans On Direct Manufacturer Sales To Car Buyers
2
Washington State Legislature. ESSB 6354 Senate Bill Report
3
Federal Trade Commission. Direct-to-Consumer Auto Sales: Its Not Just About Tesla