Used-Car Dealer Regulations Kill Small Businesses

Small used auto dealerships like this were driven out of business by restrictive state licensing regulations.

In 2004, the Michigan Legislature mandated new regulations on used car dealers that Secretary of State records show effectively put more than 850 small businesses out of business, and imposed tremendous burdens on many others. Some of these now-defunct dealerships were long-standing enterprises that had served the public for more than 20 years. Many were left with unsold cars and no way to dispose of them without taking a significant financial loss.

The new mandates were inserted late in the legislative process into a complicated overhaul of abandoned vehicle laws. They were added at the behest of the politically well-connected Michigan Auto Dealers Association — the new-car dealerships’ lobbying arm and a heavy campaign contributor to many legislators. Also involved was the organization that represents used-car dealers, the vast majority of whose members were unaffected. Both groups benefited by eliminating hundreds of small competitors.

Naturally, the destructive mandates were described as a "consumer protection" measure, as are all such restrictive licensure schemes promoted by anti-competitive cartels. As often happens, a handful of "bad apples" provided a rationale, including individuals who used dealer licenses primarily to avoid paying sales tax on vehicles bought and sold for personal use, or dealers who misled licensing authorities about whether they complied with local zoning.

To the extent those were real problems, they were better solved by enforcement of existing laws — a "rifle shot" approach — rather than a "shotgun blast" of new regulations that would significantly reduce competition in the used-car market by driving many small dealers out of business. While this may add to the bottom line of remaining large dealers, it harmed consumers by restricting their choices, and destroyed the livelihoods of hundreds of small business owners.

What are these regulations? Each dealer was required to have enough lot space for at least 10 of the type of vehicles the business is licensed to sell, be open 30 hours per week, have handicap-accessible restrooms and either have an on-site repair facility or a contract with a registered facility within 10 miles. Significantly, the measure also prohibited licensed dealerships from being home-based businesses.

Regardless of the legislation’s stated purpose, the results were devastating to hundreds of small business owners who had their ability to earn a living taken away by the state. One properly zoned home-based dealer in business for more than 20 years now has 150 vehicles that cannot be sold. Another was told by his local officials to give up his home or lose his business.

A third was a manufacturer’s representative for a company that builds 50-foot trailers for transporting vehicles. Most of his sales were made through online contacts or sales calls. Trailers would then be drop-shipped to his customers. The new law made it impossible for him to operate. He could not stay open the required 30 hours each week and make sales calls without hiring additional help. There was insufficient space and no need at his location to stock 10 trailers. Sadly, the stories go on and on.

In effect, this law authorized a regulatory taking of the livelihoods of hundreds of small business owners who can no longer use their property in the way they had done previously. It also sets a dangerous precedent for all small and home-based businesses throughout Michigan. If they find themselves in the crosshairs of larger competitors with the right political connections, smaller firms in any industry can be legislated out of business.

The federal Small Business Administration reports that 53 percent of all small businesses are home-based, and urges states to allow flexibility for these operations. This restrictive licensure law sends a terrible message to prospective entrepreneurs. The fact that the Michigan Legislature would eliminate an entire industry of home-based operations in a manner that benefits a well-connected special interest should cause great alarm to all small businesses.

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Jack McHugh is a legislative analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Larraine Stanislaw, along with her husband Joe, owns Grand Auto Plaza in Mount Morris, Mich. Permission to reprint in whole or in part is hereby granted, provided that the authors and the Center are properly cited.