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Can a car dealer charge you more than the manufactures suggested retail price (MSRP)? If you live in the United States, the answer is an emphatic “yes,” and ever since the great chip shortage of 2021 (yes, we are naming it that), more and more car dealers have increased their new car selling prices well above MSRP.
Today we’ll walk you through the laws that allow car dealers to sell their inventory at thousands, tens of thousands, and hundreds of thousands above MSRP. These laws protect dealers to markup their inventory to levels well beyond MSRP. We’ve included a bonus “craziest markups” section at the bottom of this post to give you some context as to how out of control new car pricing currently is.
In this post we’ll also give you some suggestions for how you can find dealers that are not marking their new cars over MSRP, as well as the “word tracks” you can use when trying to negotiate with a salesperson or sales manager.
Without further adieu, let’s dive in!
How can a car dealer charge more than MSRP?
Many goods are sold by manufacturers through their network of dealers or agents. Think about insurance as an example. Many insurance products are sold by an agent, who is simply a licensed producer that represents an insurer. Could you buy insurance directly from the insurer? Sure, some companies allow for that, but not all. Many insurance companies don’t want to have to deal with selling their own product. As strange as that sounds, it’s pretty common, and instead of selling directly to consumers they employ agents to do that for them.
The same dynamic applies in retail automotive. Can you buy a car directly from a manufacturer? Yes. Do most manufacturers not sell directly to consumers because they don’t want to deal with all that it entails? YES. The hassle of dealing with customers, plus franchise dealer laws in all 50 states make it an easy decision for automakers to leverage their dealer partners to sell cars. That being said, there is certainly a wind of change. There are currently 13 states there have been proposed laws to allow for automakers to sell directly to consumers.
So long as most new cars are sold through dealers, the dealers will have their discretion to price their inventory however they’d like. MSRP does stand for manufacturers suggested retail price after all. At the end of the day, the franchise dealer model is simple:
The automaker is responsible for producing the vehicle. The dealer is responsible for selling the vehicle. The bank is responsible for financing the purchase of inventory for the dealer. The customer is responsible for negotiating and purchasing the vehicle.
Within the franchise agreements that dealers sign with their OEMs they do not have rules that prevent them from marking up vehicles beyond the suggested retail price. If automakers wanted to be consumer advocates and cap the price of their vehicles, they could do this by simply adding and enforcing a price cap rule with their dealer body.
This will likely never happen. Why? Because gross profit on new cars has never been higher (upwards of 16% for Lithia Automotive), and automakers and dealers alike are enjoying this new reality. If automakers attempted to stop their dealers from selling above MSRP they would be picking a fight with their best customer (remember, the dealer buys the inventory from them!).
Common Add-ons & Accessories
Some dealerships refuse to sell their cars for more than MSRP. That’s great. The issue is that they add all sorts of add-ons and accessories to a vehicle that you didn’t ask for. Here’s a perfect example of that from a Land Rover dealership:
In this case the dealer discounted their price by $1,000. That’s awesome! Then they added $3,769.41 in accessories and add-ons 🙁
The accessories they added are:
Advanced Ceramic Tech for $1,695
Lojack for $1,195
Nuvinair for $299
Protection Pack for $580
Our recommendation in this case (and in the current market) would be to negotiate the cost of the accessories down to the dealer’s cost. The dealership incurs a cost to their service department to install these products. That cost is likely a few hundred dollars (refer to the table below). With that in mind, you’ll want to ask for the RO (repair order) they issued for the installation of the accessories.
Item
Cost to Dealer
Retail Price
Dealer Profit
Interior protection
$50
$500
$450
Paint protection
$100
$850
$750
Undercoating
$200
$700
$500
Rustproofing
$50
$800
$750
Car alarm
$300
$800
$500
VIN etching
$75
$400
$325
Lojack
$325
$1,000
$675
Nitrogen-filled tires
$35
$250
$215
Window tinting
$25
$300
$275
Additional Dealer Markup
Many car dealerships are selling their new cars above MSRP, and they aren’t shy about it. Every new car comes with a window sticker, also known as a Monroney Label. Many dealers are adding additional stickers to new cars with their additional dealer markup. Here’s an example:
In this case the dealership added both add-ons (Theft Patrol, Perma Plate, and Mobile Clear Shield Package), and a “Market Price Adjustment” of $10,000. The market adjustment is additional dealer markup. You get nothing in exchange for having paid an additional $10,000. It is pure profit for the dealership.
How to negotiate when the car is over MSRP
What can you do when a new car is for sale over MSRP? How can you negotiate a lower price? Well, as always, remember “if it’s taxable, it’s negotiable.” That means if it’s taxed on the bill of sale, you can negotiate its price.
When it comes to additional dealer markup and add-ons we encourage you to not settle for what the dealer is asking for. Dig your heels in a bit and try and get some money back in your pocket. Just because they are asking for $10,000 in additional markup doesn’t mean they won’t accept $5,000.
If the dealer is adamant about their pricing and won’t budge, consider factory ordering a new vehicle. When you factory order you can get a legally binding signed buyers order for the agreed upon selling price at the time you place the order.
Head to Deal School!
If you found this article helpful, you will likely benefit from our 100% free Deal School course. You can access Deal School for free here: https://caredge.com/deal-school/
The craziest car dealer mark ups
Thanks to the CarEdge Community, we have received dozens of reports of insane dealer mark up. Here’s a collection of some of the most egregious cases:
Tesla price increases used to be a somewhat infrequent and relatively innocuous occurrence. Not anymore. So far in 2021 the Model 3 has increased in price (MSRP) 23%. The Model Y is not far behind at a 20% price hike!
What’s behind the Tesla price increases? Should we expect to see more? Does this effect existing orders? Are other automakers increasing their prices this much? Let’s address this and more below!
Tesla Model 3 Price Increases
First, let’s start by simply looking at the data.
Tesla has not been shy about increases the price of their most affordable vehicle (the Model 3). Below is a table of Model 3 Standard Range Plus (SR+) base MSRP from February of 2019 to today.
Date
Price
Price Change
02/28/19
$37,000
03/21/19
$37,500
$500.00
04/11/19
$39,500
$2,000.00
05/14/19
$39,900
$400.00
07/15/19
$38,990
-$910.00
10/17/19
$39,490
$500.00
12/13/19
$39,990
$500.00
05/27/20
$37,990
-$2,000.00
02/17/21
$36,990
-$1,000.00
03/11/21
$37,490
$500.00
03/24/21
$37,990
$500.00
04/08/21
$38,490
$500.00
04/22/21
$38,990
$500.00
05/06/21
$39,490
$500.00
05/21/21
$39,990
$500.00
10/05/21
$41,990
$2,000.00
10/22/21
$43,990
$2,000.00
11/04/21
$44,990
$1,000.00
Since February of 2019 there have been 18 MSRP changes for the Model 3 SR+. 3 have been price decreases, 15 have been price increases. As you can see, just in the past few months the Model 3 has increased in price by $5,000.
This may have something to do with the fact that new EV tax credits are likely to increase consumer demand in 2022.
Tesla Model Y Price Increases
Tesla’s Model Y was first available for purchase in March of 2019. Since then the most common version, the LR-AWD (long range all wheel drive) trim has seen its price increase considerably.
Are other automakers raising their prices as much as Tesla?
No! While we expect automakers to increase their base MSRPs considerably in 2022, we have yet to see any other manufacturer increase them as much as Tesla.
Toyota has come closest with their nearly 20% price increase for the newly redesigned 2022 Toyota Tundra, however that is a brand new redesign. No other automakers has increased their mid-year production models MSRP anywhere near as much as Tesla has.
Why is Tesla increasing their prices so much right now?
There are two primary factors as to why Tesla is increasing their MSRP so aggressively right now. The first relates to ongoing supply chain disruptions and the chip shortage. The second has to do with new EV tax credits that will most certainly drive an increase in Tesla demand.
The ongoing chip shortage has impacted all automakers, and Tesla has not been immune to it. While their production numbers have been healthy (especially relative to peers), Tesla has struggled to produce vehicles to their specifications. Earlier in 2021 Tesla silently began removing some features and functionality from their vehicles because of a lack of chips.
There is obviously a “supply side” issue thanks to global supply chain struggles and the chip shortage, but what about demand?
Demand for new Teslas has been healthy, and it should only increase in 2022. New EV tax credits will increase Tesla demand. Previous EV tax credits no longer apply to Tesla, however the credits that will be available in 2022 will. It makes sense that Tesla is increasing their prices right now, because when consumers get $7,500 (or more) in tax credits from the government, they’ll still feel like they’re getting a great deal.
Pair a decreasing supply with an increase in EV demand, and you can start to see why Tesla is proactively raising their prices. Not to mention there is higher inflation than prior years, and you can begin to fully comprehend why we’ve seen Tesla prices increase as much as they have.
2023 Update: Major revisions to the EV tax credit were signed into law as part of the Inflation Reduction Act of 2022.
Here’s what you need to know about the latest EV tax credit revision proposal:
The 200,000 sale cap is replaced with an expiration date of December 31, 2032.
It will bring the tax credit back for Tesla, GM, Toyota and all other EV automakers, but only if strict requirements are met.
Vans, SUVs, and trucks with MSRPs up to $80,000 qualify. Electric sedans priced up to $55,000 MSRP qualify.
The tax credit will remain at $7,500, however it is now divided into $3,750 for battery mineral sourcing and $3,750 for battery component sourcing.
Final assembly must be in the United States, Canada or Mexico as soon as the bill is signed into law.
Battery minerals must be at least 40% sourced in the US or countries we have free trade agreements with until 2024, when it will begin to increase incrementally by 10% through 2028.
Battery components must be at least 50% sourced in the US or countries we have free trade agreements with until 2024, when it will begin to increase incrementally by 10% through 2028.
It will become income-limited to individual tax filers with adjusted gross incomes of $150,000 or less, and joint filers with incomes of $300,000 or less.
The tax credit can be implemented at the point of sale instead of on taxes beginning on January 1, 2024. This effectively makes it a rebate. Before this date, it remains a tax credit.
Used EVs would now be eligible for a $4,000 federal tax credit, wit a price cap of $25,000. Used EVs must be at least two years old, and the used credit can only be claimed once in the life of the vehicle.
Tax filers can claim only one used EV tax credit every three years.
Plug-in Hybrids (PHEVs) are eligible, but must meet the same strict requirements above.
The Transition Rule allows for buyers with a “written binding contract” signed before the Inflation Reduction Act is signed into law to claim the original $7,500 credit. This includes any models that will lose the credit with the revision.
As you can see, the EV tax credit is becoming a lot more complicated.
All 755 pages of the Inflation Reduction Act can be read here. The EV tax credit begins on page 381.
The EV tax credit update is not all good news. Several popular electric models would be kicked out of the tax credit until assembly, battery production and raw materials sourcing happens in North America.
These are electric vehicles that would not qualify for the tax credit under the proposed revision:
Tesla Model 3 (too expensive, RWD batteries produced overseas)
Tesla Model S and Model X (too expensive)
Rivian R1T and R1S (too expensive)
Lucid Air (too expensive)
Hyundai IONIQ 5 and Genesis GV60 (produced in Korea)
Hyundai Kona and Kia Niro electrics
Kia EV6 (produced in Korea)
Nissan Ariya (produced overseas)
Volvo and Polestar EVs (produced in Europe)
Fisker Ocean (produced in Europe)
Toyota bZ4X (produced overseas)
Subaru Solterra (produced overseas)
Official eligibility is a moving target it seems. We recommend checking the latest updates directly from the U.S. government at fueleconomy.gov for a list of eligible vehicles.
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In 2023, current EV tax credits are nonrefundable, meaning the best you can get from the current EV tax credit is cancelling out other federal income taxes you owe, with no refund beyond that. The revised electric vehicle tax credits will become refundable beginning in 2024, meaning you could potentially get money back from the government for simply buying an EV.
The Build Back Better Act would have increased the maximum electric vehicle tax credit to $12,500, however it was defeated in Congress. The BBB EV tax credit provisions controversially included an additional $4,500 incentive for EVs assembled at unionized plants.
The original EV tax credit in place from 2009 to August 2022 took away the incentive once an automaker sold 200,000 EVs or PHEVs. For this reason, Tesla and GM had lost eligibility, but are now getting it back (as long as vehicles remain under the price caps).
EV tax credit income limits
The new clean vehicle credit establishes the following income caps based on adjusted gross income (AGI):
$150,000 for single filers
$225,000 for head of household filers
$300,000 for joint filers
EV tax credit price caps
Sedans are capped at $55,000
SUVs and trucks are capped at $80,000
Once the used EV tax credit begins in 2024, it is capped at $25,000
What vehicles qualify for the new EV tax credit?
Great news for Model Y buyers, but bad news for fans of the IONIQ 5, EV6 and several other foreign-made electric cars. The Inflation Reduction Act’s Clean Vehicle Credit returns incentives to some, and takes incentives away from others.
The Tesla Model Y will qualify for the new tax credit, as long as price remains below $80,000.
The RWD Model 3 will qualify IF Tesla sources batteries from the US or Free Trade Agreement countries. Right now CATL from China makes their LFP batteries.
GM electric vehicles such as the Bolt EV and EUV will again qualify.
The Mustang Mach-E will qualify, as long as batteries are sourced from Free Trade Agreement countries.
Kia and Hyundai EVs will NOT qualify until they are assembled in North America.
Carvana (allegedly) sold someone a stolen truck. Yes, you read that correctly. A viral video on TikTok from a woman named Erin Stitt depicts the saga her and her boyfriend went through buying a 2018 Chevy Silverado Midnight Edition from Carvana, only to be stopped by six police cars and have the truck they just bought towed away.
Here’s what we know, and what you need to be aware of before you buy a car from Carvana, Vrooom, or any car dealer.
Let’s dive in.
VIN Cloning
Erin’s story is an unfortunate case of VIN cloning. This is where thieves steal a car (or in this case a truck) and cover up the vehicle’s VIN plates with a different VIN number. Criminals do this to obfuscate the true identity of the vehicle.
The procedure involves replacing the serial plate of a stolen or salvage repaired vehicle with a plate containing the number of a validly registered vehicle of similar make, model and year from another state, province or country.
VIN cloning is more rampant than you would have thought. For example, there was one case from Tampa, Florida, where the FBI found more than 1,000 cloned cars were sold across 20 different states. The most unfortunate aspect of this is that the purchaser is still be responsible for any outstanding loans, even though they didn’t realize they purchased a “cloned” car.
How did it pass state inspection?
Erin posed this question in her TikTok video, “How did a stolen truck pass state inspection?” That’s a great question, however it’s not too difficult to understand once you dig into the state inspection requirements for many of the 50 states. Most don’t require a VIN inspection, and heck, even if they do, there’s a good chance the inspector will not notice the fake VIN plates.
How can you protect yourself from buying a stolen vehicle?
What steps can you take as a car buyer to avoid being in Erin’s situation? There are a few things you can do:
If you are buying a used vehicle, always get it pre-purchased inspected. There’s no guarantee that a mechanic will be able to determine if a VIN plate is fake or not, but it’s always best to pay $150 or so to have a second set of eyes look over a vehicle.
If you are buying a car from Carvana or Vroom, and you can’t get an inspection before purchasing the vehicle, get an inspection immediately afterwards so that you can return the car within 7 days if you do identify an issue. In Erin’s case they had to take the vehicle in for service because of issues with the OnStar system, this was an initial “flag” that could have let them know to return the vehicle.
Another common scam to watch out for: title washing
VIN cloning is common (sadly), and another form of deception that criminals use from time to time is called title washing. We have an entire article on title washing that I encourage you to read here: https://caredge.com/guides/title-washing/
Used and new car prices are climbing through the roof, and the rapidly increasing “destination charge” could be the culprit. The increase in destination charges, also known as “shipping” or “freight” charges has increased so rapidly that three class action lawsuits are currently being litigated.
Destination Charge Increases
Here’s how much major automakers have increased their destination charges since 2017.
2021 Model year avg.
Change from 2017 model year
BMW
$973
–17%
Ford
$1,393
29%
GM
$1,242
21%
Honda
$1,204
23%
Hyundai/Kia
$1,104
23%
Mercedes-Benz
$1,097
18%
Nissan
$1,236
24%
Porsche
$1,350
29%
Stellantis
$1,573
16%
Subaru
$996
18%
Tata
$1,195
20%
Tesla
$1,200
5.9%
Toyota
$1,127
15%
Volkswagen
$1,207
–0.3%
Industry average
$1,220
12%
What is a destination charge?
The destination charge, also sometimes portrayed online as a shipping fee, are hidden from online advertised prices, however every buyer pays for them. Heck, even the dealership where you buy the car pays a destination fee, they simply pass that along to the end buyer.
The destination charge is a line item on the manufacturer’s invoice for a vehicle. It is a fee that the automaker sets. There is a retail price for it, and a wholesale price for it. The dealer pays a wholesale price, the consumer pays a retail price. In many cases the price is actually the same.
Destination charges are set by the manufacturer and are non-negotiable, since they are part of the vehicle’s MSRP. The manufacturer’s suggested retail price is non-negotiable (it is set by the manufacturer), however you can (and should!) negotiate your total out-the-door price (which includes a hopefully discounted selling price).
It is well known in the automotive industry that manufactures make a profit on their destination charges. Currently there are 3 active class action lawsuits against GM, Ford, and Stellantis for “deceptive” delivery fees.
From the GM lawsuit:
The lawsuit, filed in the Southern District of California, involves two plaintiffs who allege they were not aware that GM made a profit off of the destination fees it charges customers. According to Car Complaints, the plaintiffs are California resident Robert Romoff, who recently purchased a new 2021 Chevrolet Equinox with a $1,195 destination charge, and New Jersey resident Joe Siciliano, who purchased a new 2019 Cadillac Escalade with a $995 destination charge.
Who has increased their destination charge the most?
Stellantis, formerly Fiat Chrysler has increased their destination charges the most. Consumer Reports found Stellantis’ destination charges increased an average of 90 percent for Chrysler, Dodge and Jeep from 2011 to 2020, and 74 percent for Ram over the same period. And, even though no one buys them, Stellantis increased Fiat’s destination charge by 114 percent since 2012.
Surprising to many is the fact that domestically produced vehicles are also getting hit with VERY high destination charges. Take for example the new Jeep Grand Wagoneer which is built in Michigan. It comes with a $2,000+ destination charge.
What’s frustrating about the increase in destination fees is that it is yet another “black box” in the car buying process. Not only do we (consumers) have to deal with BS and bogus fees from the dealership, we also have to simply “accept” theses hidden profit fees from the manufacturers.
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