Florida’s Dealer Franchising Laws: Tesla Innovation Highlights the Forgotten Consumer

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Florida’s Dealer Franchising Laws: Tesla Innovation Highlights the Forgotten Consumer
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Journal of Undergraduate Research
Woelffer, Alex
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Gainesville, Fla.
University of Florida
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Tesla’s vow to sell its vehicles directly to consumers has forced the electric automaker to contend with a powerful network of dealerships and a century’s worth of regulations designed to protect their business model. Laws once intended to shield dealerships and their customers from coercive manufacturers are now denounced by economists, policy analysts, and Tesla itself as harmful to consumers. Numerous states have already taken sides in this battle, some by implementing bans on Tesla’s sales model and others by lifting existing restrictions. Florida, despite an active dealer lobby and dealer franchising laws that are among the most comprehensive in the nation, has silently become one of Tesla’s largest markets. Florida’s unique regulatory and economic environments provide valuable insight into the legitimacy of arguments being presented by either side in this ongoing debate.

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University of Florida | Journal of Undergraduate Research | Volume 1 9 Issue 2 | Fall 2018 1 the Forgotten Consumer Alex Woelffer Levin College of Law, University of Florida to consumers has forced the electric automaker to contend with a powerful network of dealerships heir customers from coercive manu facturers are now denounced by economists, policy analysts, and Tesla itself as harmful to consumers. ng existing restrictions. Flo rida, despite an active dealer lobby and dealer franchising laws that are among the most comprehensive in the nation, sight into th e legitimacy of arguments being presented by either side in this ongoing debate Introduction efore electric automobile manufacturer Tesla was founded in 2003, the most recent successful American carmaker to be founded was Chrysler in 1925. Before Tesla went public in 2010, the most recent American carmaker to do so was Ford in 1956. release of the Roadster, an all electric sports car, made it the first electric production car to travel over 200 miles per charge. The launch of the Model S in 2012 and the Model X in 2015 established Tesla as a household name and an unprece dented entrepreneurial success story in the mature automotive industry. Fast forward to 2017, and the Model S is the best selling luxury sedan in America 1 and the recipient of countless Consumer Reports consumers have placed deposit backed reservations for 2 Tesla has captured the att ention of the American public and has been heralded as the Apple of the automobile industry, 3 with CEO Elon Musk as its Steve Jobs. 4 Amidst a flurry of awards and media coverage, another industry first has given Tesla the title of regulatory entrepreneur, a company whose business plan hinges on resolving key legal issues. 5 Tesla is the first automobile manufacturer to entirely circumvent the established dealer franchising system. Every other manufacturer distributes its vehicles in the United States through independent, licensed dealerships, but Tesla has instead chosen to sell directly to the consumer online and through storefronts. In doing so, it has been forced to contend with a powerful national network ulations designed to protect their business model. Policy arguments have begun taking place in various state legislatures over whether or not to allow Tesla to sidestep the dealer franchising system, and numerous states have taken either side in the debate Florida, a noteworthy exception, stands in contrast to the tooth and nail battles unfolding in many states. The state has silently allowed Tesla to establish and grow its operations without intervention from lawmakers or dealers. Only Florida Senator Mar co Rubio has commented publicly on the matter, siding in favor of Tesla and against regulations automobile industry. 6 Using Florida and its regulatory environment as a platform for comparative anal ysis will provide greater depth and clarity for an issue that varies across all 50 states. Modern Disruptions of Automotive Franchising The modern hegemony of dealership franchising came to exist largely because manufacturers historically found that distri bution model to be the most preferable. However, changes to the automotive industry and to society at large have issued numerous challenges to the entrenched model of automobile sales. 7 Innovation in e commerce, changing economic conditions, and advancemen ts in new automotive technologies have been cited as reasons to question the need to maintain exclusive distribution for dealerships. The rise of the Internet has dramatically altered buying experiences, 8 but in spit e of the of the revolutionary visions of the 1990s, which predicted custom built direct to consumer automobile sales that minimized inefficiencies in distribution. 9 Such a system could have elim inated part of the existing costs created by the traditional dealer system approximately $6,245 to the in the form of transport, B


A LEX W OELFFER University of Florida | Journal of Undergraduate Research | Volume 19, Is sue 2 | Fall 201 8 2 of consumer demand for particular vehicle models and configurations. 1 Supported by the protectionist legislation that they lobbied for, dealerships have successfully resisted online efforts to circumvent their established role in automobile sales. 11 In 1 999, the Texas Department of Transportation established website for selling used cars violated the Texas Motor Vehicle Commission Code, which prohibited manufacturer direct sales. 12 Though lerships to complete their purchase, it was determined to have overstepped the strict statutory boundaries by assuming a sales role reserved for dealers. In 2001, Ford and General Motors launched websites to provide online shoppers inventory data and haggl e free pricing, but ran afoul of state legislation and disgruntled dealerships. 13 NADA is strongly opposed to manufacturer involvement and champions the benefits that consumers derive from the franchise model, knowledge and involvement in the local community, and post purchase suppo rt. 14 Modern economic developments call into question some of these claims. Dealerships have seen a steady decrease in the number of market competitors nationwide from a peak of 53,125 dealers in 1927, 15 to 16,545 in 2015. 16 Government restructuring of Gen eral Motors and Chrysler during the 2008 recession forced them to terminate numerous underperforming dealerships, 17 though Congressional pressure inevitably prevented many of these dealerships from being closed. 18 Moreover, the number of small dealerships has fallen and ownership has consolidated, with 5% of dealer principles representing 31% of new vehicle sales by 1998. 19 Franchising operations in other industries demonstrate that company owned and franchisee owned outlets can coexist within a single bra nd. Economists Roger D. Blair and Francine Lafontaine conclude that dual distribution is an equilibrium strategy in franchising, with a vast majority of franchisors choosing to directly own less than 20 percent of their outlets. 20 Moreover, they failed to observe opportunistic behavior by franchisors 21 company buybacks are infrequent and franchised outlets that were terminated had below average performance. 22 NADA asserts that small, locally owned dealerships are better able to respond to market conditions and customer preferences, 23 but this argument is diminished to some extent by the considerable consolidation of automotive dealerships. 24 However, the franchising analysis notes that smaller and more rural outlets that are further away from company headqua rters are more likely than others to be franchised, 25 context of a prohibition against dual distribution in the automotive industry. The value of franchised dealerships in post purchase vehicle s upport such as maintenance and warranty work is a seemingly more tenable argument. If competition from alternative distribution methods resulted in widespread dealership closure, consumers could lose an important and accessible venue for these services. 26 However, even if dealers lost some new cars sales to competing modes of distribution, this kind of extreme outcome seems unlikely departments, as well as the used vehicle departments, far exceed those fro m new vehicle departments. 27 The strongest challenge to the dominance of dealer founder and CEO, has emphasized a commitment to a distribution model of company owned stores and service centers that circum vent franchised dealerships. 28 Currently, Tesla lawfully owns and operates stores in 23 states and the District of Columbia, and service centers in 24 states. 29 However, Tesla is working within a political framework where dealers and their organizations co mmand a significant degree of political influence 36 bills for auto industry regulations were introduced in 22 states in 2015. 30 dealer franchising arrangement par allels the national currents of the twentieth century. The state first began to regulate this relationship with legislation passed in 1941, establishing a licensing system for manufacturers and addressing coercion of dealers to accept unwanted inventory an d wrongful franchise termination. 31 A more extensive set of regulations replaced prior legislation in 1970, forming the current legislative framework. The revised legislation offered protection from wrongful franchise termination, 32 created territorial exc lusivity for dealerships, 33 and set requirements for manufacturers to reimburse dealers for warranty work. 34 Various additions and amendments adding clarification and additional protection for dealerships were passed in the following decades. In 1980, an addition established guidelines for transfer or sale of dealership franchises and barred unreasonable interference by manufacturers in this process. 35 In 1984, a new section restricted manufacturers from owning dealerships, though it provided some exemptio ns in specific circumstances such as temporary ownership or where the manufacturer has not licensed any franchises within the state. 36 An extensive rewriting of these laws occurred in 1988. 37 This revision largely focused on clarification and textual impro vements, though it did notably expand the regulations providing established dealerships with territorial exclusivity. Numerous revisions have been passed since then, mostly minor amendments focused on changes in language and administrative issues. Legislat ion passed in 2001 expanded the procedures and remedies for wrongful termination of franchises and established a state advisory board of automotive dealership representatives. 38 Changes made over the next decade involved clarifications


F LORIDA S D EALER F RANCHISING L AWS : T ESLA I NNOVATION H IGHLIGHTS THE F ORGOTTEN C ONSUMER University of Florida | Journal of Undergradua te Research | Volume 19, Issue 2 | Fall 201 8 3 and minor revisions chiefly concerned with territorial exclusivity, wrongful termination, manufacturer incentives, and transfer and sale of dealerships. 39 The most recent revision occurred in 2016 and included a prohibition against manufacturers coercing dealers from purchasi ng goods or services from a designated vendor. 40 Presently, sections 320.60 .70 govern the relationships between manufacturers and dealers. The Florida Legislature public health, safety, and wel fare of the citizens of the state by regulating the licensing of motor vehicle dealers and manufacturers, maintaining competition, providing consumer protection and fair trade and providing minorities with opportunities for full participation as motor vehi cle 41 dealer credited with the growth of Florida based AutoNation, Inc., 42 43 Florida law goes as far as providing established dealers with territorial exclusivity by allowing them to block new dealerships of the same line make from opening in a nearby area that the establish ed dealer is adequately serving. 44 Dealers can even block new competitors f rom opening in neighboring counties. Attempts in the 1980s by the Motor Vehicle Manufacturers Association of the United States to attention to how the policy underserved customers Florida dealers at t he time served an average of 13,362 people each, well above the national average of 9,517. 45 A review of manufacturer Office of Program Policy Analysis and Government Accountability found that Florida has the most extensive and stringent laws of any state. It deemed Florida to have comparatively equal or greater degrees of regulation in five areas franchise termination, new dealership establishment, franchise sale and transfer, and availability of civil damages against manufacturers. 46 It asserted that consumer interests and free trade were undermined by these regulatory programs, and recommended reducing their restrictiveness. Economists and policy analysts have genera lly denounced the type of dealer protectionism seen in Florida as being detrimental to consumers. A report from 1972, before many states had even imposed rigorous franchising laws, estimated that economic inefficiencies caused by these laws added 9.3 perc ent to the cost of a vehicle, or $3.9 billion per year. 47 In 1986, the Federal Trade Commission concluded that state restrictions to competitive market entry by new dealerships raised car prices an average of six percent and cost buyers over $3 billion per year. 48 The FTC has continued to advocate against restrictive regulations and bans on direct to consumer sales. 49 The Consumer Federation of America has compiled thirteen different analyses of these laws, all of which concluded that they had a negative im pact on consumers. 50 Nonetheless, dealerships in Florida continue to advocate for additional protection. Proposed legislation in 2015 and 2016 was anticipated to have a positive fiscal benefit for dealerships. 51 There is a close, formal relationship betwee n dealerships and the State of Florida, as showcased by the Automobile Dealers Industry Advisory Board, a committee of industry representatives established under the Department of Highway Safety and Motor Vehicles that makes recommendations on legislation and aspects of the industry in general. 52 Four Florida organizations represent the interests of new car dealers the Florida Automobile Dealers Association, the Central Florida Auto Dealers Association, the Jacksonville Automobile Dealers Association, and t he South Florida Automobile Dealers Association. However, unlike dealer organizations in many business model and statewide expansion. Florida As A National Benchmark In spite of strict and comprehensive legislation, essentially nonexistent. Manufacturers with established dealer franchises within the state are prohibited from conducting direct to consumer sales or operating a dealers hip, but a manufacturer without any franchisees licensed in Florida is exempt from this provision. 53 Thus, Tesla is lawfully able to operate its 11 stores in Florida. 54 These Florida stores are registered to the state as Franchised Motor Vehicle Dealers, 5 5 which the governing statute broadly defines as any dealer with an agreement to sell a 56 regulatory scheme, Tesla is also authorized to established service centers independent from their sales facilities. F surpassed only by California as the largest and Texas as the second largest. 57 A share of 11.2 percent of all new and 7.8 percent of all used Model S cars makes Florida the second largest market for Tesla, while California claims first place and Texas claims fourth (behind Washington). 58 Those two states provide an excellent platform for a comparative penetration. Comparative Analysis: Texas. Texas is the largest state, both in terms of population and automobile sales, to restrict Tesla from conducting direct to consumer sales within the state. The Texas Motor Vehicle Commission Code, which forced Ford to shut down its online used car sales exp eriment, prevents Tesla from operating under its sales model within the state. The law reads that a manufacturer nonfranchised dealership; (2) operate or control a franchised or nonfranchised dealership; or (3) act in the capacity of a 59 Tesla invested legislative session to amend the law, but failed to make any


A LEX W OELFFER University of Florida | Journal of Undergraduate Research | Volume 19, Is sue 2 | Fall 201 8 4 progress in the face of opposition from a strong de alership lobby and an unreceptive governor. 60 Yet, Tesla still operates in nine different locations across Texas, with a tenth scheduled to open soon. The distinction less restrictive states is represented by the difference in name drives, or discuss pricing and purchasing. Instead, they promote brand awareness through a presentation of Tesla vehicle technology. Texans still have the ability to c ustomize and purchase a vehicle online, but they must register it in California, have it shipped, and re register it in Texas. 61 Despite this extra burden and the ban on direct sales, 2015, Texans purc hased 7.3 percent of all new and 8.3 percent of all used Model S cars in America. 62 And while Tesla has been unsuccessful in its legislative battle, it has won in the court of public opinion a Texas poll showed 85 percent in favor of allowing Tesla to bypa ss dealership regulations. 63 Comparative Analysis: California. Like Florida, California broadly regulates the manufacturer dealer relationship. The California Vehicle Code establishes requirements for dealer coercion, franchise termination, and establishme nt of new dealerships. 64 Though California does restrict manufacturer owned dealerships, it is far less strict than Florida or Texas and does not categorically limit manufacturers from pursing direct distribution or online sales. Manufacturers are allowed to operate dealerships at least 10 miles from any of their own established franchises. 65 California is the national leader in Tesla sales by a vast margin, claiming 45.2 percent of all new and 30.5 percent of all used Model S sales. 66 Besides a slight lead on population market dominance. California purchases far more luxury cars than any other state, at 15.9 percent of all cars sold. 67 The California Clean Vehicle Rebate Project offers Tesla b uyers a $2,500 rebate, as well as access to carpool lanes and free municipal parking. 68 Perhaps the most significant aspect is the home field advantage, as Tesla began in California and manufacturers its vehicles there. Consequently, California has far mor e Tesla stores than any other state 28 in total. Conclusion Inferences made in the Tesla sales debate from information regarding sales and regulations in different states should be taken with a grain of salt. It is next to impossible to analyze all of the socioeconomic factors effecting sales in each state, and the scarcity of official Tesla operations and prior manufacturer attempts at direct distribution have been insufficient to provide one si de with an irrefutable argument for the long term effects of competition to dealer franchising, leaving states with the the presence and increased dealership opposition. in state legislatures and both sides present their arguments, one particularly important group should not be forgotten the consumer. Fortunately for Tesla, this aspect of the debate swings in its favor. The FTC, economists, and policy analysts have been decrying adverse effects of dealer protectionism on consumers in near harmony for decades before Tesla brought this matter into the national spotlight. And, as Elon Musk himself noted, not one consumer poll has reported anything but overwhelming support from consumers for the direct to consumer model. 69 ACKNOWLEDGMENTS I am grateful for the comments and feedback provided by Professor D. Daniel Sokol during my research. All writing and thoughts are my own, but his guidance has been invaluable. ENDNOTES 1 David Z. Morris, Selling Luxury Sedan in America Fortune (Feb 11, 2016), best selling luxury sedan/ (last visited Mar 20, 2017). 2 Fred Lambert, Tesla Model 3: Tesla i s no w holding close to $700 million in customer deposits, Electrek (Oct 27, 2016), model 3 700 million customer deposits/ (last visited Mar 20, 2017). 3 Ken Kam, Why Tesla Is The Apple Of The Auto Industry: Part One Forbes ( Mar28,2014), hy tesla is the apple of the auto industry part one/#58c49c957b3b (last visited Mar 20, 2017). 4 Chris Anderson, The shared genius of Elon Musk and Steve Jobs, Fortune (Nov 21, 2013), http://f shared genius of elon musk and steve jobs/ (last visited Mar 20, 2017). eger id auctor leo. Nulla facilisi. Maecenas sed pretium velit, sed tincidunt elit. Pellentesque quis pretium augue. Nulla ut hendrerit lectus. Duis vel nisi s agittis, luctus libero at, auctor nulla. 5 Elizabeth Pollman and Jordan M. Barry, Regulatory Entrepreneurship (2016). Southern California Law Review, Vol. 90, 2017 Forthcoming, a vailable at 6 Jeff Morganteen, Sen Rubio: Allow Tesla to sell direct to consumers CNBC (2014), rubio allow tesla to sell direct to consumers.html (last visited Mar 20, 2017). 7 Thomas B. Leary, Preliminary View, Federal Tr ade Commission 2 (2001), A vailable at statements/2001/05/state auto dealer regulation one mans preliminary view#N_11_. 8 John T. Delacourt, New Cars and Old Laws: An Examination of Anticompetitive Regulatory Barriers to Internet Auto Sales, 3 J. of Law, Economics, & Pol'y 155, 158 (2007). 9 U.S. Int'l Trade Comm'n, Industry and Trade Summary: Motor Vehicles 21 (2002).


F LORIDA S D EALER F RANCHISING L AWS : T ESLA I NNOVATION H IGHLIGHTS THE F ORGOTTEN C ONSUMER University of Florida | Journal of Undergradua te Research | Volume 19, Issue 2 | Fall 201 8 5 10 Evan Schulz, Automobile Retail and Production in the Age of E Commerce 10 (Econ. Strategy Inst. 2001). 11 Id. at 9 12 Ford Motor Co. v. Tex. Dept. of Transp., 106 F. Supp. 905 (W.D. Tex. 2000). 13 Delacourt, supra note 27 at 164 65 14 National Auto Dealers, Auto Retailing: Why the Franchise System Works Best 1 4, https://www.nada.o rg/WorkArea/DownloadAsset.aspx?id=21474838843 15 Francine Lafontaine & Fiona Scott Morton, State Franchise Laws, Dealer Terminations, and the Auto Crisis, 24 J. of Econ. Persp. 233, 235 (2010). 16 Nat'l Auto. Dealers, NADA Data 2015: Annual Financial Profile of America's Franchised New Car Dealerships 3, DownloadAsset.aspx?id=21474839497. 17 Lafontaine & Morton, supra note 15 at 233 18 Neil King, Jr., Politicians Butt in at Bailed Out GM, Wall St. J., Oct. 30, 2009 (last visited March 20, 2017). 19 Eric Marti, Garth Saloner & A. Michael Spence, Disintermediation in the U.S. Auto Industry, (2000) available at research/case studies /disintermediation us auto industry. 20 4.2.1 4.2.2, in Roger D. Blaire & Francine Lafontaine, The Economics of Franchising (Cambridge Univ. Press 2010). 21 Id at 10.2.3 22 Id at 10.6 23 Nat'l Auto. Dealers, NADA to Automakers: Stop Unfair Business Practices, Oct.23,2012, essRelease.aspx?id=21474839700 24 Bill Canis & Michaela D. Platzer, U.S. Motor Vehicle Industry Restructuring and Dealership Termination 8 (Cong. Research Serv. 2009) 25 Blaire & Lafontaine, supra note 20 at 4. 4.2 26 Lafontaine & Morton, supra note 15 at 234. 27 Nat'l Auto. Dealers, supra note 16 at 6 28 Elon Musk, The Tesla Approach to Distributing and Servicing Cars, Oct. 22, 2012, approach distributing and servicing cars (last visited Mar. 20, 2017). 29 Tesla Motors, Inc. v. Johnson et al, No. 1:16 cv 01158, at *9 (W.D. Mich. Sept 22, 2016) 30 Amanda Augustine & Marcial Nava, Auto Dealerships: Destined for Disruption 1 (Banco Bilbao Vizcaya Argentaria, S.A. 2016), https://www.b content/uploads/2016/02/160224_US_AutoDisruption.pdf. 31 Supra note 25 at 2 32 Fla. Stat. § 320.641 (1970) 33 Fla. Stat. § 320.632 (1970) 34 Fla. Stat. § 320.696 (1970) 35 Fla. Stat. § 320.643 (1981) 36 Fla. Laws ch.84 69 37 Fla. Laws ch.88 295 38 Fla. Laws ch.2001 196 39 Fla. Laws ch.2003 269, 2006 183, 2007 195, 2009 81, 2009 93, 2013 14 40 Fla. Laws ch.2016 77 41 Fla. Stat. § 320.605 (2016) 42 Jeffrey Ball, Auto Dealers, Fearing that Detroit Will Hog the Web, Are Fighting Back, Wall St. J., May 10, 2000, (last visited Mar. 20, 2017). 43 Top 150 Dealership Groups Based in the U.S. 5 (Crain Communications2016), 7318.PDF. 44 Fla. Stat. § 320.642 (2016) 45 John Kennedy, State's Car Wars Pit Auto Dealers Against Makers, Sun Sentinel, Apr. 30, 1988 available at http://articles.sun 04 30/news/8801260821_1_dealership applications franchising new dealership. 46 Office of Program Policy Analysis & Gov't Accountability, Review of the Automobile Manufacturer Licensing Program (The Fla. Legislature 1996). 47 Richard L. Smith II, Franchise Regulation: An Economic Analysis of State Restrictions on Automobile Distribution, 25 J. of L. & Econ. 125, 150 (1982). 48 Robert P. Rogers, The Effect of State Entry Regulation on Retail Automobile Markets 1, 108 (Bureau of Econ. 1986), state entry regulation retail automobile markets/231955. pdf. 49 Marina Lao, Deborah Feinstein & Francine Lafontaine, FTC Staff Comment Regarding Michigan Senate Bill 268 (Fed. Trade Comm'n 2015), staff comment regarding michigan senate bill 268 w hich would create limited exception current/150511michiganautocycle.pdf. Marina Lao, Debbie Feinstein & Francine Lafontaine, Direct to Fed. Trade Commission, May 11, 2015 at available at ews events/blogs/competition matters/2015/05/direct consumer auto sales its not just about tesla (last visited Mar. 20, 2017). 50 Mark Cooper, A Roadblock on the Information Superhighway: Anti Competitive Restrictions on Automotive Markets 22 (Consumer Fe d'n of Am. 2001), 51 Florida S.B. 1048 (2015), Florida C.S./S.B. 960 (2016) 52 Fla. Stat. § 320.275 (2016) 53 Fla. Stat. § 320.645(1) (2016)


A LEX W OELFFER University of Florida | Journal of Undergraduate Research | Volume 19, Is sue 2 | Fall 201 8 6 54 Find Us | Tesla, (last visit ed Mar. 20, 2017). 55 Dealers By County, Fla. Dep't of Highway Safety & Motor Vehicles, (last visited Mar. 20, 2017). 56 Fla. Stat. § 320.27(1)(c)1. (2016) 57 Supra note 16 at 22 58 Tesla Expands Customer Base to Younger and Middle Class Buyers in Used Car Market,, July 29, 2015, expands customer base to younger and middle class buyers in used car market reports edmundscom.html (last visited Mar. 20, 2017). 59 Texas Occupations Code, Sec. 2301.476(c) (2016) 60 Jim Malewitz, Legislation Would Let Tesla Sell in Texas, Tex. Trib., Feb. 19, 2015, would let tesla sell texas/ (last visited Mar. 20, 2017). 61 Kathleen Burke, Tesla Sets Up Shop in Dallas -Minus Test drives and Sales, Automotive News, June 19, 2014, a sets up shop in dallas ---minus test drives and sales (last visited Mar. 20, 2017 ). 62 Supra note 58 63 Poll: Calif. based Tesla Wants to Sell Electric Cars Directly to Consumers. Should It Be Allowed to Bypass Texas Dealership Regulations?, 2013 Austin Bus. J. (2013), (last visit ed Mar. 20, 2017). 64 Cal. Veh. Code § 11713.2 (2016); Cal. Veh. Code § 3060 75 (2016) 65 Cal. Veh. Code § 11713.3(o) (2016) 66 Fla. Stat. § 320.645(1) (2016) 67 Hannah Elliott, States with the Most Expensive Cars, Forbes, Nov. 6, 2009, https://www.forbes. com/2009/11/06/luxury cars states lifestyle vehicles bmw mercedes_slide_11.html. 68 Incentives, (last visited Mar. 20, 2017). 69 Elon Musk, To the People of New Jersey, Tesla, Mar. 14, 2014, new jersey.