Tesla Will Have to Ship Its Texas-Built Cars Out of State to Sell Back to Residents

The Texas Legislature has run out of time to advance a bill that would've allowed Tesla's direct sales approach—and it doesn't meet again until 2023.

tesla texas sales
Tesla

Texas, the state that was once a country, has some unique features in its governance. One is that its state legislature meets only every other year for a maximum of 140 days, starting from “noon on the second Tuesday in January.” This year, the Legislature convened Jan. 12 and will wrap up its work on May 31 before breaking until 2023. And it will do so without making a widely expected change to Texas’ auto dealer franchise laws that would finally allow Tesla to sell its cars—many of which will be built at its new Austin factory next year—directly to the public in the nation’s second-largest state.

Teslas haven’t been completely unavailable to Texans this whole time; instead, buyers have had to use various inconvenient loopholes to take home their new electric cars. Now, Tesla is on the verge of having to jump through the most ridiculous one yet: having to ship its Texas-built vehicles out of the state before it can sell (and ship) them back to Lone Star buyers. 

Tesla

A Tesla service center.

This is not some weird hypothetical. There’s not enough time left in the current legislative section to advance the bill that was supposed to avert that Kafkaesque outcome. This is going to happen unless Texas Governor Greg Abbott calls a special session specifically to debate this topic—extremely unlikely—or some arcane regulatory exemption can be crafted for Tesla in the months ahead. So how did we end up here?

UPDATE: May 27, 2021 @ 6:00 p.m. ET: CEO Elon Musk has weighed in on Twitter. As you'd expect, he's not pleased with the situation and says Tesla "sure would appreciate changing the law." The rest of the story continues after his tweet below.

‘Deliveries’ vs ‘Pick-Ups’

Under Texas franchise laws, which are similar to those in most other states, automakers like Toyota and General Motors cannot sell you a car. They must sell their cars to independently owned third-party businesses that in turn sell them to Texans—you know, new-car dealerships. 

As it stands, Tesla’s company-owned outlets cannot legally sell a car in Texas, nor can the company “deliver” a car within the state even if bought by a Texan. Owners had regularly rallied against this soft ban as early as 2013. There are workarounds, some detailed on forums within Tesla’s own website. The company has more than a dozen Texas “galleries,” where cars can be viewed and described—though staffers may not discuss prices.

Any Texan can go online and order a Tesla through the company’s website. But no orders may be placed or processed within any Texas facility owned by Tesla. One buyer noted his paperwork had been FedExed to and from a Tesla Store in Nevada for completion.

Once ordered, the vehicle is shipped to one of Tesla’s eight Texas service centers. The buyer must first pay for it online (from outside the facility grounds), and can then drive it away—meaning Tesla has not actually “delivered” the car to a buyer, but simply made it available to be “picked up” by an existing owner.

Texas is quite happy to register it and collect sales tax on the purchase, of course.

A Change Is Gonna Come?

At last, change was expected by many in 2021 because the backdrop to the state’s legislative session was substantially different than it was in 2019. Following a highly publicized site search for its second U.S. vehicle assembly plant, the company announced in July 2020 it had chosen Austin, Texas. That Austin plant is now well into construction, and production of the Tesla Cybertruck and other EVs is to start within the next 12 months. Tesla has posted hundreds of job openings, and said it hopes to employ 5,000 people.

The Austin factory under construction in late May.

Most of the auto industry presumed that in exchange for dropping a billion dollars or so into the Texas economy, Tesla had extracted a promise or a handshake deal that the ban on selling its vehicles would be lifted. Otherwise, it was noted at the time, Tesla would face the peculiar prospect of having to ship all Texas-built vehicles out of the state—even those to be delivered to buyers within five miles of its new plant. No way that would actually happen, right?

Down to the Wire

On March 12, State Representative Cody Harris [R-District 8] introduced HB 4379, a bill that would have essentially permitted Tesla to deliver electric cars in the state. The bill crafted a narrow exception to the dealer franchise law that would allow automakers to sell cars directly in Texas if they solely built battery-electric vehicles and never maintained franchised distributors in Texas. Only Tesla and a handful of EV startups fit that description.

HB 4379 was finally heard by the House Transportation Committee on May 11, two months after it was filed by Rep. Harris. That was a win, of sorts: Earlier versions of the bill in previous sessions hadn’t even gotten that far. Sadly for Tesla, that’s where it ended; the hearing was simply the first of seven steps that must occur within 140 days for a bill to become law in Texas. But the bill was not passed out of committee by the deadline of May 13, meaning it will progress no further. The direct-sale ban will remain in place.

A different EV bill, HB 2221, filed by Transportation Committee chair Terry Canales [D-District 40] was voted out of committee. The “Electric Transportation Act” has five ambitious goals to spur EV usage in Texas, but it stalled after that step.

Jeff Carlson, Harris’s chief of staff, was simply pleased HB 4379 got its committee hearing in the first place: “That’s a big deal,” he said. He expressed confidence the testimony would “open some eyes” in the state to the positive attributes of allowing direct EV sales. He suggested such sales would be “the future of the state,” which might well like to attract other EV makers once Tesla has opened its plant. He also pointed out that the outcome reflects the way the Texas Legislature is designed to operate. “It’s a process built to kill bills, not to pass them,” Carlson said.

So another bill to exempt Tesla (and other direct-sale automakers) will have to be introduced two years hence, and the process will start all over again.

Decades of Dealer Lobbying

To be clear, while this particular bill got tripped up by Texas’ unique legislative calendar, it also faced the same lobbying headwinds that have stalled similar efforts to break the grip of dealers nationwide—not just over the last few years, but stretching back decades.   

During the 1990s, when carmakers wanted to clamp down on the worst of their dealers and compete with corporate dealership chains like AutoNation, they floated the idea of buying existing dealerships or setting up company stores to sell their cars. The idea was that shoppers might prefer a fixed price for a car, without the “price adjustment” markups on popular models, let alone the hard sells for everything from undercoating and floor mats to nitrogen-filled tires or financing that gives the dealer a cut of the profits.

Understandably, dealers who had significant investments in property, operations, and employees, often over generations of family ownership, were alarmed. They feared carmakers selling direct could undercut them on price. Relatively quickly, lobbyists for each state’s auto dealers convinced state politicians to add provisions to their franchise laws making it illegal for carmakers to sell in direct competition with their own franchised dealers.

And there it rested until Tesla came along. It had no franchised dealers to be protected, so it reasoned those laws shouldn’t apply to it. It opened company stores and sold its cars online, offering to deliver them to any address a customer specified.

Tesla

Car dealers disagreed, vehemently. In fact, they appeared to view Tesla’s model as an existential threat. As early as 2010, the Colorado Automobile Dealers Association got a bill passed that widened the ban to any automaker trying to sell any car to a member of the public.

Why? Dealer association president Tim Jackson explained in 2012 that it’s all about auto dealers protecting car buyers by making it illegal for Tesla to sell vehicles to them:

  1. Tesla owners would be left helpless if the company failed, closing its service centers—whereas dealerships service cars even if they’re no longer made;
  2. Tesla has better things on which to spend its capital than brick-and-mortar stores and service centers (an interesting assessment for a state dealer lobby, but whatever); and
  3. The good reputation of all auto dealers would be deeply damaged if Tesla were to fail, leaving their owners high and dry.

I’ll leave you to make your own judgments about the strength of those arguments. But little seems to have changed among dealer lobbyists in the intervening decade. And absent a nationwide standard, a messy patchwork has developed to both accommodate and stymie the direct-sale efforts of Tesla and other new (and mainly EV-focused) automakers.

In many states, you can order a Tesla online and have it delivered. In other states you can do the same, but specifically cannot place the order within a Tesla Store (or showroom). Yet others allow direct sales, but only of EVs, with each company limited to a set number of stores. New York has permitted Tesla to sell at five locations since 2014, for instance.

texas.gov

What's More Important Than EVs? Well...

Wedbush Securities analyst Daniel Ives told the Austin American-Statesman in March that Tesla producing cars in Texas that it first had to ship out of state to sell to Texans “would be a huge (public relations) black eye for Texas.” He said he would be “shocked” if lawmakers didn’t change the rules.

That doesn’t appear to have concerned the legislature. It spent a very great deal of time debating firearms, reproductive rights, religious concerns, and which bathrooms trans kids would be permitted to use. It did not change its franchise laws. There is some talk of a follow-up special session, though it can address only issues specifically cited as reasons it must be held. Franchise laws will not be one.

Tesla no longer has any communications or press relations department, so we had no way to reach out to the company for comment. (Tweeting the CEO to beg for a comment does not constitute an adult interaction.) Still, it seems hard to imagine General Motors, Ford, or Toyota blithely agreeing to drop a billion-dollar facility into a state where it must ship the cars it builds there out of the state to sell them to residents of that same state.

Thanks to Texas-based policy analyst Brian Moon Zabcik for research assistance and explanations of the state Legislature and its process.

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