A Summary of California Car Dealership Requirements
Car dealerships in California are subject to a myriad of generally applicable provisions regulating the ways in which they can operate. Chief among these are the Vehicle Code’s provisions governing dealers and manufacturers, and its related provisions on sales contracts.
Dealers and Manufacturers
Dealers and manufacturers must be licensed by the Department of Motor Vehicles (the "DMV") and otherwise comply with the provisions of the Vehicle Code applicable to those categories of business, otherwise known as the "Vehicle Code Dealer Provisions." The DMV must verify that an applicant for a dealer’s or manufacturer’s license has complied with zoning requirements and passed a criminal background check. (e.g. see Cal. Vehicle Code ยงยง 11701, 11800, 11805 and 11709) The Vehicle Code Dealer Provisions include the information required to be provided by a dealer within a sales contract and the authority of a dealer to retain possession of a trade in prior to paying off the loan. They also govern the disposition of certain special funds paid by a buyer or responsible parties such as the DMV’s "Occupational Licensing Administrative Fund" , the "Vehicle Theft Recovery Trust Fund" and the "California Highway Usage Fee Account." The fund payments are made at the time of sale but are not for the compensation of services or products sold in connection with the car purchase. Thus, they can cause confusion regarding whether they are subject to the California sales tax but the answer is no. To those regulatory requirements, the DMV’s Dealer License Verification Unit ("DLVU") adds the requirement of maintaining certain records and making them available for inspection. These records include business records, sales and service records, and credit records. In addition, a dealer must maintain liability insurance with minimum coverage limits. While not a regulatory requirement, it is also common for dealers to require their employees to maintain auto insurance as well. Other state agencies regulate how auto finance companies must deal with their customers including, for most of them, the requirement to carry a license of their own.
Licensing and Operating Standards
In order to become a car dealer in California, a business must obtain a car dealer’s license from the DMV. Chapter 4 of Division 5 of the Vehicle Code governs the purchase and sale of vehicles by California dealers. The facts that must be disclosed on an application include:
The application is filed with the California DMV along with: (1) an established place of business in California; (2) fingerprints and other identification; (3) proof of occupational background; (4) proof of location in California; and (5) fingerprinting. A business name must be chosen that complies with all applicable local business laws and does not utilize a fictitious business name (e.g., "The Smith Group". All employees must be registered with the DMV, and the dealership must carry auto liability insurance and maintain a vehicle dealer bond in the amount of $50,000.
Once licensed, the dealership enjoys various exemptions from such regulatory controls as the Consumer Legal Remedies Act, unfair business practices, the Truth in Lending Act, and the Unfair Practices Act. Additionally, it may be able to utilize a "Buy Here Pay Here" financing plan.
Consumer Protection Laws for Car Dealerships
In addition to the general laws governing motor vehicle sales and leases, California has consumer protection laws that control the sale and lease of motor vehicles. These laws provide additional rights for the consumer beyond what is granted by the general laws. Among others, the California consumer protection laws may be applicable to: advertising, warranties, lemon law coverage, odometer disclosure, debt collection practices, credit reporting, vehicle theft and recovery, financing compliance, repo practices and deficiency judgments.
Each of these topics is covered in other sections of this site, but one area of consumer protection laws that is not directly covered elsewhere is the right of the consumer to return the vehicle to the dealer. For most sales of retail consumer goods (such as furniture, televisions, refrigerators), the seller routinely gives the buyer a limited period of time to examine and test the item after it is delivered to make sure that it is suitable. In California, however, there is no such law applicable to the sale of motor vehicles. Nevertheless, some auto dealers routinely give consumers the right to cancel a sale if the vehicle turns out to be unsuitable for the consumer. The dealer may have a money back guarantee program or a return policy. The dealer can also advertise a specific period during which returns are allowed, such as 5 to 7 days.
For consumers looking to take advantage of such a program, they need to contact the specific dealer directly to find out whether such a policy exists and, if so, what the specific terms are. The dealer may make certain representations that a consumer must rely on. As a result, the dealer should give the consumer a written copy of the policy.
Advertising Restrictions for Car Dealers
When it comes to advertising, both federal and California law place restrictions on what dealerships can say. The biggest rule is that a dealership cannot misrepresent a vehicle in any way. This applies to new and used cars, even if the car was certified pre-owned or came with a warranty. Failure to disclose the vehicle’s condition through some type of written documentation can lead to penalties and lawsuits .
Other restrictions on advertising include: Because it is important that a dealership not misrepresent themselves in anyway, a dealership should engage in due diligence when preparing advertisements. They should also run advertising past their attorneys to ensure they are compliant with California and federal laws.
Environmental Laws and Safety Obligations
California car dealerships are subject to strict environmental laws and regulations governing everything from the use of hazardous substances to storm water runoff. Under California’s Hazardous Substances Account or "HSAA," it is presumptively unlawful to release any hazardous substances on or under any "release site" and an immediate and continuing duty to immediately report releases to the State Water Resources Control Board. The HSAA regulates the rights of injured parties to recover unreimbursed response or removal costs from facility owners and operators and imposes strict deadlines for pursing claims against them. California Vehicle Code sections 27150-27159 impose noise limits and require emissions testing. Section 27156 requires that motor vehicles manufactured after January 1, 1979 be equipped with a device that stops the driver from operating the motor vehicle if its failure results in a vehicle emitting smoke or other particulate matter in excess of prescribed levels. California President’s Message has reported that 43% of new vehicles sold in California are "clean air vehicles" such as hybrids.
Resolving Disputes and Legal Matters
In the realm of California car dealership law, disputes and legal issues are unfortunately common. It is important for both consumers and dealerships to be prepared for the possibility of conflict.
One typical scenario involving disputes between California car dealerships and customers is the violative financing agreement. If there is a significant discrepancy between what the owner and consumers thought they’d paid for some aspect of the vehicle, that can become a source of contention. However, many conflicts arise under the accusation of unfair trade practices, such as deceptive advertisements or price fixing agreements.
When it comes to legal resolution, there are many different paths. The first is mediation, where a neutral third party reviews both points of view and attempts to broker a settlement. Often, this can be accomplished by the California Department of Consumer Affairs and their regulatory divisions. (*Note: consumers are legally protected against fees from mediators when the action is brought to the court or an administrative tribunal by a governmental agency). If mediation fails , the matter can defuse with an informal settlement or move on to more formal arbitration or litigation.
During arbitration, both parties are expected to comply with the process in a good-faith effort to come to a mutual agreement. This may involve the submission of documents to prove either side of the case as well as testimony from those involved in the transaction. After all evidence is presented, the arbitrator will issue a decision.
If an arbitrator does not settle the case, or if you wish to pursue litigation, an individual can file an action in civil court against the dealer. The plaintiff (or claimant) is represented by counsel, who will prepare the case and go before a jury, judge or both, depending on the type of case and preferences of the claimant.
California law regulates the deadline for taking legal action. In most cases, an action must be filed within four years after the cause of action.