The Virginia motor vehicle dealer board ruled yesterday that TrueCar’s business model is in violation of the state’s dealer licensing laws, which prohibit third-party services from acting on behalf of the dealer in the sale of a motor vehicle.

At its regularly scheduled meeting yesterday, which had TrueCar representatives in attendance, the board ruled that dealers cannot pay TrueCar if it is unlicensed to sell vehicles in the state. Bruce Gould, executive director of the board, said the ruling applies to all services and not just TrueCar.

“We don’t know if there are any other third parties that have similar models, but this would apply to them as well. So, this just doesn’t apply to TrueCar,” Gould said. “TrueCar, I believe, has another model they are working on, so we’ll see what they come up with.”

TrueCar provides a service that allows car buyers a view of a vehicle’s dealer cost, market average, factory invoice and sticker price. It then provides buyers three dealers who have the vehicle they want at the going rate. The tradeoff for the dealer is that they don’t have to pay for the lead ($300 for new vehicles, $400 for used) unless the sale is completed, a model Gould said is in violation. 

“The dealer should not be paying them because they are not licensed dealers and not licensed salespersons,” said Gould, who added that the state will not seek retroactive prosecution against TrueCar dealers. “They can’t compensate anyone other than those two.”

Scott Painter, founder of TrueCar, maintained that TrueCar is not a broker, dealer, sales agency or buying service during an e-mail exchange last week. He described his service as more of a marketing channel that competes against traditional advertising and lead-generation services. “Our staff does not sell or get involved with the selling of vehicles …,” he said in response to questions raised by Virginia and other state regulators about his service. “We’re in discussions with regulators in those states and have already begun working through the compliance process. We see no insurmountable compliance issues in those states at this time.”

TrueCar, which suspended its service last week in Colorado after regulators raised similar questions, will likely present a model similar to the one it employs in Texas, which also has prohibitions against brokering and “bird-dogging.” The model uses target pricing and allows dealers to compensate the service on a subscription basis. Painter said the company should be able to demonstrate compliance with state laws by the end of January.

Gould had originally raised concerns about the TrueCar service in a letter sent to Painter last August. He sent a second letter in late December after dealers called his office to get assurances that TrueCar’s service was in compliance. And while other states, such as Colorado, have gone after TrueCar’s advertising practices, Gould said he focused more on the licensing issue.

“Not too long ago, a newspaper established an online listing of vehicles for sales, where the dealers paid the newspaper each time a customer ‘clicked’ on one of the dealers’ listed cars,” he wrote in his Dec. 20 letter to Painter. “The board deemed this model to be in violation of [the state’s licensing laws].”

With its decision, the board has asked Gould to issue a notice that will provide dealers with guidance on the state’s licensing law as it relates to TrueCar and other similar services. The board’s next meeting is scheduled for March 12. Gould said he wasn’t sure if TrueCar would be on the agenda.

“If they have another model that appears to me that our board needs to look at, then we will put them on the agenda,” he said yesterday. “Basically, Virginia, as in a lot of other states, says a dealer can pay a flat fee for leads. So, if there’s a third party that dealers pay some flat fee every month regardless of whether the third party sends them one lead or a thousand of leads, there can be no connection whatsoever between the lead and the payment.”