Dropshipping - Is It Legal?
What is dropshipping?
Some beginners find it hard to believe that a business model where you never touch the items you're selling is legal, but in reality, dropshipping has been around for a long time and has always been legal.
At its heart, dropshipping is a business model where you (the retailer) do not keep stock of the goods you are selling, meaning that your customers orders are fulfilled by the manufacturer of the goods or a sourcing agent.
In this sense, it could be seen as obvious that dropshipping is not only a legal business model, but also an advantageous way of running a company - as there is no need to hold stock that won't sell, a smaller upfront investment is needed and you have the ability to list an enormous range of products on your website.
However, the legalities of dropshipping can get quite complicated, in this article we're going to cover all the common scenarios that you need to take into account.
Ethical violations and the Grey Area
Before eCommerce came about, issues with suppliers were commonplace. For this reason large corporations started using the dropshipping mode of fulfilment for some of their products. The only thing that changed with the advent of eCommerce is that dropshipping became accessible for small businesses and individuals alike.
Even though dropshipping in and of itself is completely legal, if you’re not careful and don’t do your due diligence, you might run into potential liability, especially taking into account that there are large players with deep pockets out there. For that reason it is best to learn of the potential implications and stay on the safe side.
What will follow is a discussion of all of the key factors that must be considered by anyone who is thinking of starting a dropshipping business.
The legal side of dropshipping
One of the first things that come to mind when starting a dropshipping business is: Do I need a licence?
To put it simply, in order to start a dropshipping store and begin selling products from that store, you don’t need any type of business licence. However, that being said, just because it’s not a legal requirement does not mean that it is not a good idea to factor that in, especially taking into account if you’re going to run a long-term, legitimate business. Outlined below are some of the reasons why you might consider getting a business licence.
Please note, this article is for educational purposes only and should not be taken as a legal or financial advice. Rules and regulations are widely different from county to country. Be sure to do your due diligence and carefully evaluate each potential option.
This is where having a business licence helps the most. If you purchase stock through your store, there is less risk to incur personal liability. This is particularly important if you live in a country that’s prone to litigations, such as United States.
The risk of liability is particularly high when it comes to dropshipping, due to the fact that this business model is heavily reliant on (for the most part) foreign suppliers, such as AliExpress, Alibaba, etc. In China, for instance, product quality and customer protection laws are much more lenient than in the West and refunds, more often than not, are hard to come by.
Apart from getting a business licence, something worth considering is product liability insurance, this will limit your legal and financial repercussions in case of faulty goods are being sold through your store. It will also cover any legal fees arising from a potential dispute (including personal injury, property damage, pecuniary loss, etc). This problem shouldn’t arise assuming that you stick to the safe niches, as we teach in our article on the niche selection, nevertheless, it’s better to be safe than sorry, so it is something worth to consider.
TaxesTwo things are unavoidable in this life: Death and taxes. As well as with a business licence, taxes can be very different depending on your jurisdiction. Irrespective of your country of residence, there are two key elements that come into consideration: Sales tax and income tax. Once again, if in doubt, always consult a professional.
LegitimacyThis is one of the most important aspects of your business when you’re getting started. In order to succeed in dropshipping, one needs to form strong business relationships with the overseas suppliers. No one wants to be dealing with someone who is unprofessional and untrustworthy, for this reason having a business licence can be quite valuable. Having a business licence will increase your legitimacy in the eyes of the suppliers, as well as consumers.
Dropshipping store best practices
Whilst in some jurisdictions customer refunds are prescribed by law, in others there is no such requirement. Nonetheless, irrespective of jurisdiction, 99.9% of stores around the world have some sort of refund scheme, a legitimate business cannot simply state: “No Refunds”.
It is important that you clearly outline what your store policy is when it comes to refunds. Sooner or later every business will have a dispute and having a refund policy to refer to can make things run a lot smoother.
Disclaimers are statements made by you in order to make it clear to the customers how your business operates. Unlike legal agreements, these statements are just there for the customer to take notice. These can be quite important when it comes to limiting your liability, in case a potential dispute should arise.
Common disclaimers include:
- Health & Safety
- External Links
It is important that you don’t over do it and scare away your customers with disclaimers popping up in every page. What types of disclaimers you use and in what quantity will depend on what your niche is, what type of products you’re selling, the risks involved, etc.
Marketing best practices
Amazon and eBay
Amazon and eBay are two of the largest online marketplaces in the world. For that reason it is understandable that many sellers want to take their business to those platforms. Strictly speaking, eBay and Amazon do not prohibit dropshipping, however, it is important to ensure that whilst trading on those platforms you abide by their company policies. It’s particularly important that you abide by the seller requirements, below is a brief outline of things that you should be aware of.
What new dropshippers often do, when they first start selling on Amazon or eBay is to purchase items from big retailers, such as Walmart and then placing them on Amazon/eBay for a significant mark-up. It’s basic knowledge that retail prices are different to wholesale prices, therefore buying from big retailers and then re-selling those same items again on eBay/Amazon constitutes a double mark-up and constitutes a noticeable price inflation.
Understandably, such practices are undesirable and put your seller account at risk. Moreover, because of the final price being too high, this deters most customers from buying anyway, so no matter how you look at it, it’s simply not worth it. Dropshippers have an ethical obligation to both the consumers and ecommerce platforms to source their items from wholesalers, at a wholesale price.
When it comes to ecommerce marketplaces, proper usage refers to sellers sourcing unique products from manufacturers and wholesale suppliers for their online store. Most ecommerce marketplaces have certain rules and regulations when it comes to shipping times. Therefore, it is important that you develop a strong relationship with your manufacturers in order to abide by the rules set in place by the marketplace.
Other important considerations:
- Rules on packaging
- Following the refund and return processes
- Following the marketplace’s policies and agreements
Using the big online marketplaces alleviates one of the biggest headache’s when it comes to running your own ecommerce store: Marketing. Beginners can spend hundreds if not thousands of dollars on Facebook ads and Google ads before they make their first sale. Using places like eBay and Amazon solves that problem to a large extent (although you still have to compete with the big brands). If you’re planning to use those marketplaces, it’s only fair that you abide by their rules.
After running your dropshipping business for quite some time your sales will grow and your customer base will expand accordingly, you will likely amass a significant number of repeat buyers. More traffic will allow for alternative marketing tactics, such as newsletter subscription, where you can provide valuable content and exclusive offers to your loyal customers.
It is important to ensure that whilst advertising to your audience you comply with the anti-spam laws legislation of your jurisdiction. For instance, in the US anti-spam laws are quite strict and can lead to criminal enforcement.
Please note anti-spam best practices:
- State clearly if you’re advertising
- Clearly state your business location
- Include customer opt-ins
- Explain clearly the opt-out process
- Honour the opt-outs
- Avoid using false or misleading information
- Store consent information
Finally, ignorance of the law excuses no one, so make sure you are aware of amendments and alterations.
Dropshipping From Your Own Website
Imagine you have a store hosted on Shopify or WordPress (which you might do already) and you want to dropship from it - You list products on your site, market your goods and get a sale. In this scenario, you are relying on your supplier (a store on AliExpress), to fulfill the order and have it arrive safely with your customer.
Provided you find the best supplier for your product, the customer should receive their item on time and be happy with their order. As dropshippers, we recommend you manage customer expectations properly, and let them know that your items will likely take 7-20 days to reach them.
In some cases, beginners think that selling products at a markup (a higher price than you bought it for) is an underhanded tactic. However, in reality, every single business on the planet sells their products at markups. That is exactly how businesses have operated and made money since the beginning of time.
Companies need to sell products at a markup to pay their employees and reinvest money back into the company, so they can make better products in the future. For example a Nike shoe may cost $17 to make in a factory, but is sold for $170 RRP, a designer handbag may cost $200 to make, but can be sold for $2500 or more. Similarly, most products you buy on Amazon can be bought on AliExpress for a fraction of the price.
The exact same product being sold on Aliexpress for $3.69 and $19.99 on Amazon.
To conclude, it is perfectly legal to sell & dropship products on your own website. But the question remains, what are the best products to sell?
Selling Restricted Goods
It should come as no surprise that you should not sell illegal or dubious goods when dropshipping, such as branded / trademarked items, counterfeit luxury goods, restricted imports. Even CBD oils / vapes require having an appropriate Age Check that complies with the policies of your country or territory (and, indeed payment processor). Below are a few examples of goods that cannot be sold using the popular payment processor Stripe (which therefore also includes Shopify Payments).
- IP Infringing Merchandise / Goods (e.g. Merchandise from your favourite TV Show)
- Counterfeit or Unauthorized Goods (e.g. Fake Designer Handbags)
- Regulated Items Such As Fireworks, GunPowder
- Drug Paraphanelia (e.g. Bongs, Vapes, Hookahs)
- Adult Toys and Entertainment
You can find the full list of restrictions here
Some of these, such as IP infringing or Counterfeit Goods, are not allowed at all by any reputable payment processor or website host; however the sale of drug paraphernalia and adult toys is not specifcally restricted by, for example, Shopify. In this scenario, you can do your own research as to which payment processor will allow your dropshipping store to take payments for goods such as these. For IP infringing goods especially, it is possible to get into serious legal trouble if you even list such items on your store.
Dropshipping Using Shopify & Aliexpress
If you hadn't already guessed by now, Shopify, Aliexpress & Oberlo support dropshipping businesses. Aliexpress is our favourite platform tosource products for beginner and intermediate dropshippers , the wide selection of products, increasing support for dropshippers and escrow system makes it perfect for selecting items to sell online.
In other words, using these platforms is the ideal way to make sure your business stays legally protected and PCI compliant.
Legality of Dropshipping In Your Country
There are no countries that explicity prohibit dropshipping, however you should look up the laws on specific items that could be prohibited to import into the country. Countries like Australia have strict import laws that have to be taken into account when dropshipping.
In addition to this, you will want to take a look at the tax laws related to dropshipping in your country. In the United Kingdom, for example, tax laws become much more favourable once you register an LLC. PayPal & Stripe will generally ask for your business details once you start making over a certain amount of money so that they can comply with these laws, it's useful to be prepared for this as these payment processors reserve the right to hold your money until they are certain about the legal status about your business.
Dropshipping is an excellent way to make money, as long as you take into account all the relevant laws regarding which items you can sell. In most cases, entrepreneurs end up starting successful dropshipping businesses without any legal issues.
Here is a quick summary of all of the necessary steps for you to take, in order to ensure that your dropshipping business is not breaking any legal or ethical requirements:
1. Consider getting a business licence: This will go a long way when it comes to taxation, liability and will fundamentally legitimise your dropshipping business, both in the eyes of your suppliers and consumers
2. Consider displaying documents that give a clear outline of your business practices: This applies to things like the refund policy, data collection and usage, various legal agreements, etc.
3. Ensure that your marketing tactics are legal and ethical: Make sure your marketing strategy goes in line with the anti-spam legislation of your business residence and don’t forget to take into account your customer’s perspective when it comes to receiving your marketing materials
4. Do not sell illegal, restricted or dubious goods: This includes things like drug paraphernalia, counterfeit items, restricted goods, adult toys, etc.
A great way to not have to worry about the legality of what you are selling is to use SaleSource to browse vetted, trending products that are ready out-of-the-box to sell online.