Disclaimer: This content is intended for informational and entertainment purposes. Please consult with a lawyer before making any legal decisions about your business.
If we’re honest, dropshipping is a pretty sweet gig. You don’t have to worry about stocking, shipping, or storing products. When you sell other people’s products as a dropshipper, you can take a cut and let most of your business run on autopilot.
That sounds great, right?
Sometimes it sounds too good to be true, and that’s why so many people wonder if dropshipping is legal.
To set the record straight: yes, the dropshipping business model is a legal, valid business model in pretty much every country in the world. It’s a beneficial way to get into the eCommerce game because:
- There are fewer barriers to entry. Dropshippers have very few startup costs, so it’s an affordable way to get into eCommerce without a boatload of debt.
- It’s cheaper than traditional eCommerce. Don’t worry about shipping or storing products when you’re a dropshipper; your trusted supplier takes care of that.
- It’s flexible. As we learned from the COVID-19 pandemic, eCommerce sellers have to be fluid and adjust their offerings. Dropshipping gives you the flexibility to change products without spending much money.
While dropshipping has many benefits, its legalities can get pretty complicated, especially if you’re selling to customers worldwide. You need to structure your business correctly and follow dropshipping best practices to grow your business into something that’s both resilient and legitimate.
A little bit of planning and a call with your lawyer will set you on the right path. While you should always run an ethical business, you also need to stay on the right side of the law.
Learn why dropshipping can be risky from a legal standpoint and follow these five requirements to protect your business.
Why Dropshipping Can Be Risky
We love dropshipping, but like any business model, it isn’t without risk. If you’re considering jumping into dropshipping, you’ll face risks in several areas:
- Competition: eCommerce is often a race to the bottom. Since you’re a dropshipper, anyone can sell your products. You might be tempted to price products lower than anyone, but keep in mind that you can get in trouble if you have to follow pricing rules like MAP.
- Control: As a dropshipper, you’re placing a lot of faith in your supplier. Even if you get a good supplier, if they drop the ball a few times, it reflects poorly on you. You have zero control over what the supplier does or how they treat your customers, so this can open you up to liability if they do something illegal.
- Supplier scams: Speaking of bad suppliers, some suppliers are outright scam artists. They’ll rip off other brands’ products, take your money, and give customers a terrible experience. A bad supplier is a legal minefield you don’t want to cross.
- Product arbitrage: Are you doing dropshipping arbitrage? If you’re buying products from one marketplace and reselling them elsewhere for more money, you’re likely doing arbitrage. However, platforms like eBay and Amazon have banned it, so if you’re dropshipping on a platform, this practice can get you in trouble.
- International sales: Dropshipping is legal in pretty much every country. However, some dropshippers choose to steer clear of certain countries because of their pricing, marketing, or shipping laws. You’re free to dropship to your heart’s content, but if you’re selling internationally, you must navigate a web of complicated laws to stay compliant.
Most Common Dropshipping Compliance Issues
Even though the dropshipping business model is completely legal, there are a number of areas where you need to ensure that your online business is compliant to stay on the right side of the law.
Let’s have a look at the most common ones.
🔺Tax laws
Like any business, dropshippers are liable for taxes, including collecting and remitting applicable sales taxes, paying income tax, and paying applicable customs and duties when importing goods from another country.
🔺Licencing laws
Many states in the USA require a retail business, which includes dropshipping companies, to have a valid business license and a sales tax permit. Here is a list of states requiring a sales tax permit and instructions on where and how to obtain one.
🔺Copyright laws
As a dropshipper, you must ensure that you don’t sell counterfeit goods violating copyright laws. This means you must ensure that your suppliers do not ship counterfeit goods to fulfill your orders, as you can be sued for infringing on another company’s intellectual property rights if they do.
🔺Consumer protection laws
You might not be making the products you are selling, but that doesn’t mean you are not responsible for the quality and safety of the products shipped to your customers. This means that you must ensure you comply with the applicable consumer protection regulations for the areas in which you are selling your products.
🔺 Truth in advertising laws
Like any retailer, you are responsible for accurately representing the products you sell in your online store. You will most likely encounter legal issues if your marketing efforts mislead your customers about the products you are selling. So, it is important to ensure you comply with relevant truth in advertising laws.
Now that you understand the areas in which you will need to stay compliant, look at the following best practices to help ensure you run a legitimate business.
Five Dropshipping Legal Requirements to Protect Your eCommerce Business
Dropshipping does have its flaws. If you want to protect yourself and your business in the long run, we highly recommend taking legal steps to legitimize your business.
If you aren’t sure where to start, consider these five dropshipping requirements to legitimize your business. As always, make sure you talk to a lawyer before doing anything.
1 - Vet dropshipping suppliers very carefully
As a dropshipper, you depend entirely on your suppliers to store, ship, and fulfill every order. If you sign on with a low-quality or fake supplier, you’ll not only be out thousands of dollars, but you could even land yourself in hot water with the law.
You can still be liable if your supplier does something legally shady. For example, if the supplier sells knockoff Disney merchandise they assured you was real, you could still be in trouble. You're still liable even if you honestly believed the merchandise was legitimate and acted in good faith.
That’s why you need to vet suppliers very carefully. This is one of the most important decisions you’ll make in your dropshipping business, so don’t include a supplier in your supply chain without careful consideration.
2 - Sign contracts for everything
Handshake agreements still happen, but they won’t protect you in a court of law. Get absolutely everyone involved in your business to sign a contract, including:
- Suppliers
- Contractors
- Freelancers
- Employees
- Platforms (if you sell on a platform)
Hopefully, you’ll never need to use these contracts in court. But having contracts in place from the start can wrap you in a protective layer against lawsuits. Hire a lawyer to draft and review every contract that goes through your business. You want these contracts to be airtight so you’re actually protected if you’re taken to court.
3 - Get a business license
You don’t have to get a business license to start dropshipping. You can just create your store and go.
But just because you can do that doesn’t mean you should. In the US, registering your business:
- Makes it easier to file taxes. Combining personal and business taxes can get messy, so keep everything separate.
- Proves you’re real. If you’re trying to work with a higher-caliber supplier, they will want proof of your legitimacy. Your incorporation papers will get your foot in the door.
- It can protect you legally by limiting your legal liability. If a customer sues your LLC, you probably aren’t personally on the hook. That’s the difference between losing just your business or losing both your business and your house.
It’s pretty easy to set up an LLC if you’re in the United States. Look up the regulations specific to your country or province to file for the appropriate licenses.
4 - Share the right disclosures with shoppers
There’s nothing worse than an unhappy customer—except for an unhappy customer who’s also litigious. You want to protect your dropshipping business from lawsuits as much as possible. A good way to do that would be to disclose information to shoppers, like:
- Refund policies: How does your supplier deal with refunds? Have a plan in place so you can clearly spell out your return policy to customers. By managing their expectations from the start, you can prevent a lot of angry emails and potential liability.
- Disclaimers: Is there something dangerous in your products or packaging? You might want to include disclaimers on your website or products. This not only protects customers (like choking hazard warnings), but it can also protect your business in the event of a customer injury.
- Terms and conditions: Every eCommerce website needs this. It isn’t required by law, but it’s a good way to cover yourself.
- Privacy policy: If you collect any type of customer information on your website, you need a privacy policy. Since you’re selling eCommerce products and need customer info to ship every sale, you have to have a privacy policy on your website. Failure to include one can put you at risk for GDPR penalties and plenty of other legal headaches.
5 - Follow email marketing laws
If you’re in the US, you’re probably aware of the CAN-SPAM Act. This spells out how, exactly, businesses can contact customers via email and phone calls.
Every email your dropshipping business sends out must honor CAN-SPAM and any other city or state requirements. That includes proving an existing relationship with your customer, honoring unsubscribes, and other simple but mandatory requirements.
Failure to follow email marketing laws can put your business at serious risk of a huge fine per email, so take this seriously.
The Bottom Line
Dropshipping is a legal way to earn a living. But like any eCommerce business, you have liability issues when choosing a dropshipping model. You can shield your business (and yourself) from liability by future-proofing your business with the five dropshipping legal requirements listed.
However, you should also consult relevant legal professionals to ensure your operation isn’t violating any laws.
But we know legalities are just one side of the puzzle. When you want to grow your dropshipping operation to be streamlined and profitable, you need expertise on your side. Check out Spark Shipping to streamline tedious to-dos so you can focus on the mission-critical tasks in your business.