Is it lawful to sell inventory you don’t own? What’s the implication on your tax returns? Can you face legal liability for a product you don’t produce? You’ll need reliable answers to these questions before you can confidently start your eCommerce business or grow an existing one.
This guide answers these questions, explores caveats as to whether dropshipping is legal and provides tips to meet regulations as a dropshipping business.
How dropshipping works
Dropshipping involves selling a product you don’t produce, own or possess. Instead, this business model centers on outsourcing inventory, handling and shipping to a third party — called a supplier.
Envision this scenario: A customer orders from your dropshipping store and completes the payment. That triggers a notification to your supplier, who has the product stocked. The supplier processes the order and ships it to the customer. You pay for the supplier for their service, then pocket the rest.
Yes, dropshipping is a legal business model, although there are a few areas of caution to address, as with all legitimate business ventures. Top brands like Nordstrom and Prada use dropshipping to fulfill orders. In 2022, Foot Locker sourced 65% of its dropshipped products from Nike. Dropshipping helped Gymshark become a billion-dollar fitness brand.
Dropshipping is legal in the United States as long as you follow local, federal and international laws. If you comply with regulations that impact your product, follow marketplace terms of service and adhere to agreements with third-party suppliers, you’re en route to success in the U.S.
Notably, you don’t need a limited liability company to start dropshipping in the United States; you can start selling and transition into a traditional business later.
Starting a dropshipping business doesn’t have any legal age restrictions. But there’s a big caveat: If you’re a minor, you can’t legally enter contracts with eCommerce platforms or payment processors.
Since such contracts are crucial, partnering with a parent, legal guardian or another adult representative will work wonders for an underage dropshipper.
Established brands have turned to dropshipping to boost business performance. Since dropshipping entails some risks and legal considerations, it speaks to faith in the business model that huge companies rely on dropshipping.
To illustrate, note how the following brands used dropshipping to grow:
- Zappos: Started by selling shoes online using the dropshipping model.
- Zola: Dropshipped wedding gifts via its eCommerce store.
- Wayfair: Has a detailed dropshipping page to educate its partners.
- Nordstrom: Used dropshipping to achieve 20% growth during the COVID-19 pandemic.
- Macy’s: Maintains a documented dropshipping process it calls Vendor Direct Fulfillment
Follow in these brands’ footsteps by carefully considering the legal requirements of dropshipping.
- Read and sign dropshipping supplier contracts.
- Get product liability insurance.
- Comply with dropshipping policies on online marketplaces.
- Correctly file your tax returns as a business.
Let’s consider these legal requirements in-depth so you can take the right steps as a new dropshipper.
Read and sign supplier contracts
Before signing with third-party suppliers, thoroughly review the contract terms. Ensure there are clear lines regarding product pricing, shipping, return policies, expectations and responsibilities. Talk openly with suppliers about terms and concerns prior to closing the deal.
Once you’re satisfied, sign the contract and confirm all parties have a copy. To succeed in dropshipping, communicate clearly and know the contract terms well. This sets the stage for a strong and lasting partnership.
However, occasionally reassess your terms to reflect market changes and thoroughly benefit from your partnership.
Get product liability insurance
Product liability insurance is like a shield — it protects you if someone or something gets damaged by a product you sell. The insurance steps in to cover the costs of dealing with that situation.
Even when a product is high-quality and follows safety regulations, accidents happen. And in other cases, defective products go unnoticed. The insurance safety net will keep you financially afloat, especially since lawsuits are expensive and product quality control is simply out of your hands. This makes insurance practically necessary.
Business insurance companies like Superscript focus on helping dropshippers. But you can also get this business insurance from traditional brands like Allstate and Chubb. Invest in product liability insurance for the peace of mind.
Comply with dropshipping policies across marketplaces
Follow the rules of each platform you sell on. Be careful: Amazon, Etsy, Wayfair, eBay and other marketplaces have unique dropshipping rules. Occasionally revisit the policies to confirm you’re above violations and penalties.
Relieve the stress of business by actively adopting transparent fulfillment methods tailored to each platform.
Manage tax returns as a dropshipper
Dropshipping is legal, but neglecting taxes isn’t. Get a tax registration number if required, carefully follow sales tax regulations and pay your taxes on time. For good measure, keep detailed transaction records; as a bonus, you’ll have an easier time claiming tax deductions for business expenses.
Use accounting software for efficient financial management, and consult a tax professional for personalized advice and updates on tax law changes. Additionally, ask them about picking a business structure and registering with the government.
Lastly, clearly communicate taxes to customers.
How to avoid legal trouble while dropshipping
Dropshipping has legal risks, just like any business model. Let’s look at five legal concerns associated with dropshipping and outline how to minimize them.
Risk: It’s illegal to sell items that infringe on intellectual property, which often takes the form of trademarks, copyrights and patents. The rightful owner of an intellectual property can take legal action if you overstep, even though dropshipping is legal in general.
Prevention: Research the products you intend to sell, specifically whether they could infringe on intellectual property rights. Inquire whether the product design is patented and whether the visuals and slogans are original. Due diligence is vital to avoid legal complications.
Risk: Legal consequences can arise if buyers are harmed by products associated with your dropshipping company. Although you don’t make or deliver the product, you can be held responsible.
- Choose reliable suppliers and thoroughly vet the products you sell.
- Communicate product safety guidelines to customers.
- Equip product liability insurance.
Respect consumer protection laws
Risk: Misleading advertising and deceptive practices can result in legal issues. Failing to fulfill orders can also prove problematic. Dropshippers must comply with consumer protection laws, which vary across jurisdictions.
- Familiarize yourself with consumer protection laws in the regions you operate in.
- Provide accurate product descriptions, detailed shipping information and clear terms and conditions.
- Address customer complaints promptly.
Risk: Some payment processors prohibit certain types of products or business models. Violating these terms can result in the suspension or termination of your account.
Prevention: Before you choose your store’s payment processor, review its terms of service and consider whether you can follow them. Be transparent about your business model when setting up an account with the payment service.
Risk: Shipping regulations and customs policies vary widely between countries. Non-compliance includes inaccurate customs declarations and importing prohibited items, which can lead to legal issues.
- Research shipping regulations for countries you ship to; personally understand their customs requirements.
- Collaborate with reliable shipping carriers with experience in those countries.
- Prioritize accuracy in product listings and shipping times, specifying per region if needed.
Consult legal professionals, especially eCommerce law experts, regarding your compliance.
Get legal advice on whether you need special permission or documents to sell a product. Proactively contact local customs control if you sell children’s products, medical equipment or health products.
Lastly, stay informed about changes in the legal landscape. That way, you can consistently update your business practices to mitigate legal risks.
Let’s explore dropshipping’s legality on some popular online marketplaces, namely Etsy, Amazon, eBay and AliExpress.
On Etsy, you can only resell craft supplies and vintage items, meaning more than 20 years old. Unless you’re dropshipping products that were stocked two decades ago, Etsy’s dropshipping opportunities are few.
Etsy prohibits reselling in the handmade category; that section is reserved for sellers who create or design what they sell. Etsy forbids dropshipping handmade items or falsely claiming creatorship of the product.
While dropshipping is legal, Amazon rules say you can’t buy and ship items on the platform without owning the stock. You must provide your seller’s information to comply with Amazon’s rules.
- Always say you’re the seller on invoices and packaging.
- Don’t mention suppliers in packaging or descriptions.
- You’re responsible for handling product returns.
- Follow Amazon rules when you draft your contractual seller agreement.
eBay permits dropshipping if you own the listed items. You can also engage in dropshipping with a wholesale supplier agreement, in which product ownership is transferred to you. Using a retailer’s agreement won’t suffice since that doesn’t entail product ownership.
The platform prohibits retail arbitrage. In other words, you can’t buy a product from a marketplace and then sell it at a markup on eBay. Another caveat is you can’t list items not in your possession, intending to source them after landing the sale on eBay.
To safely dropship on eBay, you’ll need to:
- Signify on packing slips that you use third-party fulfillment.
- Ensure the items are safe throughout the fulfillment process.
- Establish a contractual agreement that suppliers won’t misuse customer information.
Yes. You can even connect your store to AliExpress via API for easy setup. AliExpress offers buyer protection and a refund policy covering defective or undamaged items. Hence, you can find good suppliers on AliExpress.
Tips for building a legitimate dropshipping business
After making a few considerations, you can build a legitimate, economically viable dropshipping business.
Customers will love it, and customer satisfaction leads to word of mouth and social proof. That’s marketing you don’t have to pay for.
You’ll have the opportunity to sell your products at a premium and increase profit margins. With the extra money, you can invest in your business’s growth through a sales team, customer support or a new product line.
Online marketplaces demand transparency, and so do consumer protection laws. Beyond compliance, transparent pricing fosters trust with your buyers, which is the first step toward consumer loyalty and a positive brand reputation.
It’s a strategic move for long-term profitability and credibility in the dropshipping industry.
Both laws and online marketplaces demand quick resolution when returns and refunds are requested. The smoother and faster you handle it, the more your dropshipping business’s credibility will shine and deter negative reviews.
Guarding customer data is vital in dropshipping because trust is key. Many customers won’t take a chance on a company with sketchy data practices. If you want to build a loyal following, show customers they can count on you.
Plus, it shields your business from legal headaches. When you follow the law, your dropshipping aspirations can sail smoothly.
When you get customer reviews, testimonials and ratings, flaunt them via review tools and website plugins. Legitimate social proof boosts sales and counteracts false claims.
Social proof reassures potential customers that dropshipping is legal, your product is high-quality and buyers receive it properly. It also highlights your product’s best qualities and consistency.
Neglecting complaints and product inquiries will impact your business financially and legally. In contrast, prioritizing customer support leads to happy customers and sidesteps legal headaches.
Thankfully, online marketplaces and website plugins offer handy customer service tools, including automated response bots, ticket systems and review responses.
The intricacies of dropshipping legality include age restrictions, tax obligations and legal liabilities. Use this guide as a checklist to take proactive steps, make informed business choices and earn more money with dropshipping.
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Dropshipping legality FAQs
Yes, dropshipping is legal in many countries outside the U.S. — however, the legality of dropshipping hinges on complying with local business regulations. You’ll also need to follow tax laws and consumer protection standards in every jurisdiction you ship to.
Marketplaces must follow consumer protection laws. They also need to enforce intellectual property rights and safeguard customer data. Only use platforms that you trust to do these things.