The Middleman Tax: State-Mandated Car Salesmen
TL;DR
Background: As explained in a recent ICLE issue brief, automobile-dealer franchise laws force vehicle manufacturers to sell through franchised dealers even when no franchise relationship exists. Enacted between the 1930s and 1970s to regulate bargaining between automakers and dealers, these laws now function as mandatory-middleman rules—a state-imposed distribution layer between automakers and consumers.
But… Updating the U.S. Justice Department’s (DOJ) 2009 framework with current vehicle prices, interest rates, inventory data, and dealer operating costs, the brief estimates that direct distribution could save roughly $3,934 to $4,992 per vehicle. On today’s roughly $50,000 average transaction price, that amounts to an efficiency gain of 7.87% to 9.87%—effectively an implicit surcharge on every new-car purchase.
Moreover… Mandatory dealer intermediation fragments the national market, burdens interstate commerce, and fits poorly with modern vehicle business models built around digital retailing, centralized non-negotiable pricing, software-defined features, and over-the-air updates. States should not mandate a single distribution model when competing approaches can better serve consumers. Removing the “middleman tax” would lower costs, expand consumer choice, and better align the law with the realities of the modern automobile market.
KEY TAKEAWAYS
Protecting Yesterday’s Market
Dealer laws were enacted when the “Big Three” of General Motors, Ford, and Chrysler dominated the market and manufacturers were seen as holding overwhelming leverage over dealers. Legislatures designed these laws to police that automaker-dealer relationship. The statutes assume that one exists.
That market is gone. The Big Three’s combined market share has fallen from roughly 90% in the 1950s to about 40% today. Dozens of manufacturers now compete for consumers, while newer entrants such as Tesla, Lucid, Rivian, and Scout have no franchised dealer networks at all.
Applying franchise-protection laws to companies that never used franchises is a category error. It turns rules meant to govern an existing vertical relationship into bans on competing business models. Their persistence reflects a familiar pattern of regulatory capture: concentrated dealer interests preserve rents, while consumers bear the costs.
The Middleman Tax
Franchise laws impose a structural restraint on distribution. They require a two-tier system, even when direct sales would be feasible and more efficient. The result is a “middleman tax”: not a separate line item, but a real cost embedded in nearly every vehicle sale.
Updating the Goldman Sachs framework adopted by the DOJ in 2009 suggests direct sales could save consumers roughly $3,934 to $4,992 per vehicle. Those costs stem from matching supply to demand, carrying inventory, maintaining dealership facilities, paying sales commissions, and managing shipping logistics. The estimate also excludes consumers’ time costs. Buying a vehicle still consumes roughly 13 hours of research, dealer visits, and negotiation.
These estimates are likely conservative. Higher interest rates, rising commercial real-estate costs, and increasingly complex vehicles have made large brick-and-mortar dealer networks even more expensive to maintain. Bottom-up analyses using current dealer financial data consistently match or exceed the scaled estimates, suggesting the true cost of mandatory dealer intermediation may be even higher.
Selling a 1956 Model in 2026
Dealer-franchise laws assume a transaction model in which a manufacturer builds a vehicle, ships it to a dealer lot, and the dealer negotiates the final sale with the consumer. Their core provisions cover termination, territorial allocation, facility requirements, and related issues.
Modern vehicles increasingly revolve around software. Over-the-air updates, subscription-based features, integrated charging networks, and centralized non-negotiable pricing reflect an ongoing manufacturer-customer relationship, rather than a one-time dealership sale. Meanwhile, service revenue—the lifeblood of many dealerships—shrinks as manufacturers deliver fixes and upgrades remotely. That creates a structural conflict between software-centric vehicles and a distribution system built around repeated dealership visits.
Applying franchise laws to direct-to-consumer manufacturers stretches those statutes beyond reason. These companies have no franchisees, franchise agreements, or territorial allocations, yet remain subject to a mid-20th-century framework designed for all three. The result is a fragmented patchwork of state laws that makes it harder for manufacturers to operate under a consistent national distribution model.
One State, Everyone’s Rules
Manufacturers cannot realistically operate one distribution model in permissive states and another in restrictive ones. As a result, a small number of restrictive states effectively dictate how vehicles are sold nationwide. That is precisely the kind of extraterritorial regulation the so-called “dormant” Commerce Clause was meant to prevent.
Direct-sales bans are legally vulnerable on two grounds. First, they discriminate in practice against out-of-state manufacturers that prefer direct distribution. Second, even if formally neutral, they likely fail the balancing test from Pike v. Bruce Church. The consumer costs—amounting to billions of dollars nationwide—far outweigh any plausible local benefits, especially because less restrictive alternatives already exist, including licensing rules, disclosure requirements, lemon laws, and service-availability guarantees.
The consumer-protection rationale for these laws is largely post hoc. Dealer-franchise statutes were enacted to protect dealers from manufacturer coercion, not consumers from manufacturers. Rebranding them as consumer-protection measures does not change either their original purpose or their real-world effect: shielding an incumbent distribution model from competition, while consumers pay the price.
Let Consumers Choose
The guiding principle for reform should be simple: allow channel competition. States should not lock manufacturers into a single distribution model when multiple approaches can serve consumers. The cleanest solution is to repeal direct-sales bans entirely and let manufacturers choose any lawful distribution strategy. Where repeal proves politically difficult, states can replace categorical bans with licensing and disclosure rules that protect consumers without outlawing competing models.
The case for reform is straightforward. Protecting an incumbent distribution channel is not the same as protecting consumers. Allowing manufacturers to compete through different sales models would lower costs, expand consumer choice, and better align the law with the realities of the modern automobile market.
For more on this topic, see the International Center for Law & Economics (ICLE) issue brief “The Middleman Tax on Car Buyers: How Dealer Franchise Laws Raise Vehicle Prices” by Kristian Stout and Subiksha Ramakrishnan.