Tech entrepreneurs love disruption.

Regulators, not so much.

Every time a company such as Airbnb, Netflix, Amazon or Uber upends a long-established industry, it tends not only to stress that sector’s existing leaders, but also the legal framework that guides industry regulation.

And the auto industry is the latest industry to feel the pinch of tech disruption, thanks to a cadre of online car sellers such as Carvana, Shift and Vroom that came to prominence during the pandemic.

It is unclear which companies will eventually emerge as market leaders. There’s considerably more consensus around the idea that the existing regulatory regime is not equipped to deal with large-scale online car sales.

“We don’t have a legal infrastructure that addresses [online car sales], and we haven’t figured out statutorily how we’re going to regulate this,” says J.D. Decker, administrator and chief of police for the compliance enforcement division of the Nevada Department of Motor Vehicles.

The core issue is that in most states, the laws governing auto sales are built based on several once-reliable assumptions that are suddenly much less so, such as that most transactions would occur in person at a dealer’s lot. Plenty of practices and regulations are built with a dealership in mind, ranging from dealership territory boundaries to dealer-lot title audits and pen-and-ink signature requirements. But in the new era of online car sales, not only do many transactions take place across state borders, but often it can be difficult to discern the location of a car listed for sale.

“Our laws and rules around vehicle sales were written back in the ‘60s and ‘70s, when the internet wasn’t a thing,” says Paul Steier, director of vehicle programs at AAMVA and previously the director of a law enforcement unit within the Iowa Department of Transportation.

It has long been legal to buy a car from an out-of-state dealer, but in the old days, many of those transactions occurred just over the border, and officials in each state knew their cross-jurisdictional counterparts. The difference now is both the sheer volume of cross-jurisdictional transactions, as well as the loss of proximity. These days there is much less familiarity, and more uncertainty.

That relative absence of inter-agency communication is a problem right now even for smooth transactions, because of challenges related to titling and temporary registration. When bad actors get involved, the situation becomes even more serious, leaving online car buyers with large potential liability and little clarity in terms of which state agency might be able to help.

And bad actors love disruption almost as much as tech companies.

“Where there’s fraud that can be committed, you’re going to have the criminals that are going to capitalize on that opportunity,” says Christina Michel, deputy director of the investigations division for the California Department of Motor Vehicles. “It’s really hard right now because the laws haven’t caught up to this modern world.”

Regulatory paperwork struggles to keep pace

The internet is not the only technological advance underpinning the rise of online car sales. Manufacturing improvements have led to a decrease in the number of repair-prone “lemons” for sale. As buyers have grown more confident in the quality and reliability of the average car, they have also grown willing to do something that many industry observers once considered unthinkable: buying a car sight-unseen.

“If you told me 15 years ago that people en masse would be buying cars off the internet that they’d never seen or test-driven before, I’d say you were crazy,” says Decker. “Yet now it’s very normal.”

In 2021, that shift in buying habits combined with a record volume of used car sales began to strain the systems that states use to produce title and registration documents following an interstate sale, and that can take weeks or months to complete. Some online sellers issued a series of temporary tags to buyers so they could stay on the road; in other cases, buyers had to park their new cars while waiting for the paperwork to catch up.

In the latter case, “you had citizens who were madder than heck, but they didn’t know who to complain to” because of the various state agencies involved, Steier says.

The endless parade of temporary tags was not ideal, either. In Nevada, Decker pulled over a motorist who showed him a stack of temporary tags from several different states that one of the online marketplaces had sent, a violation of state vehicle registration laws. Decker issued a citation—and suggested the driver raise the issue with the marketplace.

“I figured if consumers start wanting their money back, maybe they will realize they have to start doing it right,” Decker says.

Still, Decker empathizes with the online sellers. After all, the temp tags were an attempt to solve a pressing customer-service problem that still lacks a clear solution.

One possible down-the-road fix could be a shift toward electronic titling, which carries the potential to enhance both the speed and reliability of transactions compared to the current system, which still relies on printed documentation. AAMVA is making progress in an effort toward developing an e-titling solution.

An era of borderless car sales

For many online car buyers, hassles related to temporary tags and registration hang-ups are soon forgotten once the proper paperwork is in place. But those are the happy customers. The shift toward online car buying has also produced some horror stories involving damaged or stolen cars, or those with undisclosed liens, and investigators say that online transactions can make it especially difficult to track down the bad actors, which can include crimes aimed at tricking dealers as well as consumers.

Education is part of the solution: AAMVA recently hosted a webinar aimed at training state regulators how to spot and shut down operators of fraudulent car-sales websites. California’s Michel recommends that car buyers check with sellers to ensure that they have a title in hand before handing over a check.

Another component is clarifying the interagency handoff points for transactions that cross state lines. That applies both to buttoning down the inter-agency communications protocols and processes, as well as alerting consumers to key information, such as which sets of state regulations apply during the various stages of an interstate vehicle transaction, says Bruce Anderson, president of the Iowa Automobile Dealers Association.

If something goes wrong in an interstate transaction, consumers “need to know [which state agency] is going to help,” says Anderson. “The nightmare scenario is, well, neither. So we need to make sure that there’s a governance structure in place, and that the customer knows who they’re dealing with and what the rules are.”

Anderson also stresses that the auto industry is different than some others that have been earlier targets of tech disruption, such as the music or hospitality industry. One key difference is cost: buying a vehicle is one of the most expensive—and thus high-stakes—purchases many consumers will make.

That dynamic “demands that there be some regulatory oversight and protections built in to make sure that the customers are adequately protected,” says Anderson.

That means that while online car sales are here to stay, they may never be quite as instant and frictionless as some other tech-enabled transactions. That is the balance that state officials must try to maintain as they contemplate new laws that will better govern a changing industry.

“You hate to impede the flow of commerce, and you hate to make life difficult for the honest citizen or the honest car dealer,” says Steier. “So we’re always trying to find a balance between not making it too difficult, but you also don’t want to let it be wide open for fraud and criminal activity.”

To learn more about the best practices for the regulation of internet vehicle sales, go to tinyurl.com/382hvst9.

Listen to our podcast on online vehicle sales here: tinyurl.com/yeywau57.

AAMVA has many internet vehicle sales resources available to members. Check them out here: tinyurl.com/n8rwdvyp.