California is one of Tesla's largest markets, accounting for 16% of the carmaker's global deliveries last year, according to Reuters calculations.
But the German carmaker beat Tesla to become the first carmaker to receive authorisation to sell or lease cars with an automated driving system to the public in California.
The approval was granted to Level 3 Mercedes-Benz "DRIVE PILOT" system that allows a driver to legally take their eyes off the wheel but must be available to resume control in need.
The "DRIVE PILOT" system can only operate on highways during daylight at speeds not exceeding 64kph, the DMV said.
Mercedes-Benz said in a statement it will make the automated driving system available in the US market as an option for its model year 2024 S-Class and EQS Sedan vehicles.
The first deliveries for the respective S-Class and EQS Sedan models are expected later this year.
Other systems currently on public roads such as Tesla's Autopilot or General Motors' Super Cruise are classified SAE Level 2, which handle some driving tasks but require drivers to pay attention at all times.
Tesla calls its level 2 driving assistant system as "Full Self-Driving" and says a driver must constantly supervise the feature and intervene as needed to maintain a safe operation.
The permit grants Mercedes-Benz permission to offer its "DRIVE PILOT" system on California highways in the Bay Area, Central Valley, Los Angeles, Sacramento and San Diego and on interstate highway connecting Southern California to Nevada.
Earlier this year, Mercedes-Benz also received an approval to deploy advanced automated driving systems on Nevada's roads.
