Is Dropshipping Legal?

Legal Disclaimer: The information included in this blog post is for educational and thought-provoking purposes only. It does not constitute legal advice, nor does it create any type of attorney-client relationship. If you are seeking legal advice, please contact your own attorney before investing any time or money into items that may fall into any of the outlined topics, or if you plan on taking any further actions regarding the content provided. Contact an attorney when making important business decisions regarding setting up an entity, taxes, trademarks, etc. Dropified and the author of this content do not assume any legal liability, you are responsible for your own legal decisions.

If you came here looking for the simple answer to “is dropshipping legal?”… Yes, it is.

Dropshipping is perfectly legal, however, there are several elements of legality that must be considered when developing and running your online business.

What Is Dropshipping

The reason people ask the question “Is dropshipping legal?” is due to skepticism – many wondering, how is it possible to make money and sell products online without holding or owning any inventory?

Due to that, I’d first like to outline what dropshipping actually is to ensure a multi-angled and exhaustive approach to the question… The definition as outlined by Shopify’s Ultimate Guide to Dropshipping; Dropshipping is a retail fulfillment method, where the online store does not stock the products it has listed in a warehouse.

When the store sells its product, it then purchases the product from a third-party supplier – most commonly a wholesaler – and has that product shipped directly to the customer. In doing so, the merchant never sees or directly handles the product in the fulfillment process.

In saying this, many critics still feel as though dropshipping raises ethical concerns from a consumer perspective. It must be noted dropshipping does not simply allow people to gain free money online at the expense of the consumer.

In order to have a successful dropshipping store, countless hours are spent on product research to establish a market, and furthermore, a quality product to align with it.

From here, the dropshipper must then effectively market that product to the correct audience at the right time to influence a purchase. Ad spend can deeply cut into any margins presented, and thus, result in a large expense to online entrepreneurs.

Another way to look at dropshipping… Dropshippers are marketers within the supply chain that present the right product, to the right consumer, at the right time; In order to solve a problem, the consumer may have – or did not know they had.

Often times, if the product was not marketed to the consumer effectively through the dropshipper, they may never purchase said product in the first place.

Possible Ethical Violations and the Grey Area

The main component that dropshippers need to consider when it comes to factors that could influence situations of legality, is that of ethical violations. Even though certain situations within dropshipping are not necessarily outlawed; ethically, there are several factors that need to be considered as to not get yourself and your business in hot water.

There are many larger entities out there that may not take lightly to your testing of the grey area, and thus the creation of legal situations you may never thought of could potentially arise. Since you may run into several grey areas of ethical and legal situations, it’s best to err on the side of caution – be a good neighbor and treat each situation with care and diligence.

The following will discuss different areas that must be considered as an e-commerce entrepreneur. It is important to at least understand each element before and during your process of developing an online store. Once it is understood, for the credibility of others within the industry as well as yourself, please place it into practice.

Legalities Concerning the Business

Business License

A major question that immediately comes to mind, especially with brand new dropshippers is – do I actually need a business license?

The simple answer first, in this case, is no – technically you do not need a license to develop a store and to begin selling products. That said, just because it’s not required does not mean it isn’t a good idea to factor it into your business operations.

The following factors begin to develop the reasoning as to why having one is a great idea if you want the professional elements in your life to be easier, as well as to be taken more seriously in the business world.

Please note, depending on which country you plan to register your business, there are different options as to which type you should register as. Be sure to diligently evaluate your options as to which will be the best for your situation.

Tax Purposes

Taxation brings an equivalent perspective to the business license itself, depending on your geographic situation it may differ slightly or greatly to a business operating in another country or jurisdiction. That said, it is still one of the most important elements in legitimizing your business and having it recognized by not only your customers, but your country as well.

A few elements of taxation to consider are both the sales tax on your products, as well as an income tax on your profits. Since this is an ever-evolving element of e-commerce, be sure to consult a tax lawyer and accountant when it comes to taxation.

In the future, Dropified will have a post solely dedicated to this topic so keep an eye out. For now, just know that this is an area for careful consideration.

Liability

By having a business license, your personal liability will be lessened if an issue arises from a product purchased through your online store. This is extremely important, especially if you are conducting your business in a litigious country, such as the USA.

In dropshipping, sourcing products outside of your home country from sites such as AliExpress, may raise the opportunity for product defects due to differing regulations on production. Taking the measures to protect yourself in the worst-case scenario is never a bad idea.

Further to your business license lessening personal liability, you can also consider getting Product Liability Insurance as well. Product Liability Insurance is a form of General Liability Insurance; it’s meant to protect your business from acquiring financial and legal risk due to poor quality goods sold through your business.

Since it covers the legal and court costs of defending any claims that may have arisen through a defective product (bodily injury, property damage, financial losses, etc.), it’s an excellent option to further cover yourself and your business.

In dropshipping, your consumers will be the general public, therefore, many consider Product Liability insurance absolutely necessary. You can be absolutely certain that the quality of your products will not cause harm, that said, a dissatisfied customer can create a legal battle to make your business venture hell.

An important note, product liability cases can be some of the most expensive to litigate.

Legitimacy

The third component can be looked at as the value-added aspect, or the most important in getting started. If you are looking to form solid relationships with suppliers, or be viewed as a trustworthy source for products; having the business license ultimately legitimizes your entity in the eyes of consumers and any other business’ you plan on working with.

Over time, you will have to complete documents for suppliers or other business transactions, validating your business license again will allow you to increase legitimacy in these circumstances.

Store Semi-Requirements

Developing from the previous section of legitimacy; the reason this section is labeled as a “semi-requirement” is that these elements are not required on your online store to conduct business or to start selling. They are, however, very highly recommended in order to be viewed as trustworthy in the eyes of your consumers. In addition, they may offer additional protection in the event an issue arises.

Refund Policy

For your online store, refund policies are not required – however, you cannot simply state “No Refunds”. Due to variability and changes in circumstances, of course special cases need to allow this and thus protective measures are in place for consumers.

By outlining what your store’s policies are, customers will know in advance what they are entitled to, should a product not meet their expectations or is potentially defective.

Should disgruntled customers want a refund or exchange, having a refund policy will allow you to refer to the document and hopefully meet on common ground.

Unfortunately, in these situations, the customer is going to have the benefit of the doubt. Not from a settlement perspective, but from potential damages to your brand.

If a disgruntled customer were to open a dispute – based upon the fact that you do not have a refund policy – they may not win the dispute, however, this can have a major impact on your brand credibility.

The internet is a wild place and opinions run rampant, whether they are correct or justified. Always do your best to protect yourself AND your brand.

Legal Agreements

Your e-commerce store should most definitely include your Terms and Conditions as well as your Privacy Policy. Privacy Policies are required by law in the event you are collecting personal information.

Since it is not possible to conduct an online transaction without gaining personal information – that includes names, addresses and banking or credit card information – you will want to include this in this section of your website.

Some countries and jurisdictions may not have a Privacy Policy legal requirement, that said, your website is most likely accessible globally, so you will want to have one!

Terms and Conditions are not necessarily required by law, however, again this is a protective measure to alleviate your legal risk. Circling back to exposure to liability, you will want to inform your users of your business practices. This may include, again, your refund policy and how you go about conducting returns or exchanges.

In this section, outline the rules for utilizing your website – this can be another protection measure if you have anything that could be impacted through stolen intellectual property or if you have a customer reviewing the website in an unproductive or harassing manner.  

Disclaimers

Statements made in order for customers to have a better understanding of your website and business practices for their protection are known as Disclaimers. These are not agreements like the items listed above, but rather allow a customer to take notice.

They often appear as warnings to the customer and again limited your liability in the event of a dispute. Of course, it may seem as though your website could be laden with warnings around situations and products, however, by having a section solely for your disclaimers is again a great preventative measure.

A few common types of Disclaimers:

• General Legal
• Health and Safety
• Affiliates
• External Links

You do not necessarily want to scare away customers by over-saturation of disclaimers, however, there are some that should definitely be added with consideration. This is always dependent on your product type and the level of dependence your customers have on access to information in this regard.

Ethical Marketing Best Practices

eBay and Amazon

Dropshipping is legal on eBay and Amazon, or generally acceptable – you just need to ensure you abide by their requirements for doing so. As two of the largest online marketplaces in the world, it makes sense to want to source products and attract customers through these platforms. Essentially, there is a correct way to conduct dropshipping on eBay and Amazon, and ethically wrong ways.

The ethically wrong way could essentially be explicitly against the rules – therefore, it’s extremely important to study up on their seller requirements should you be interested in utilizing these platforms. For now, we will look at a quick synopsis of the do’s and don’ts in order to give you a general picture.

Ethical Violations

The simplest example of getting into hot water on eBay and Amazon is to source products from other reputable online stores and then placing them on these platforms at a markup.

Many people will find excellent exciting products on one platform, like Walmart or Costco, and simply upload them to their seller accounts on eBay and Amazon.

The biggest problem with this is it is simply retailer to retailer and price inflation. Often times this simply isn’t worth it anyways because of the lack of opportunity for a worthwhile markup.

Hopefully the customer would see through this due to noticeable price inflation, however, by not sourcing from a wholesaler the dropshipper is not only being ethically irresponsible to the consumer – but also to these platforms who forbid doing this.

Proper Usage

Proper usage of these platforms is to find a unique product from a manufacturer and then upload to your store. Typically, on these sites shipping timelines are of utmost importance and therefore you will have to formulate the correct relationship in order to fall within the websites requested shipping timelines.

A few other considerations:

• Packaging guidelines and documentation.
• Accepting and abiding by the return process.
• Complying with each platform's policies and agreements (outside of your own).

In the end, having your own store and marketing to a unique audience will alleviate the potential desire to exploit the grey area of each sites regulations. Of course, these platforms have an easy opportunity for product exposure to a mass audience, however, there will be more and more regulations to abide by and in some cases, it is simply not worth the hassle.

If you are interested in eBay and Amazon, ensure you go to their respective websites and ensure to study the guidelines and act ethically.

In the event you are shut down, this could not only impact your ability to do business with them but could be brand tarnishing if anything comes back to your own platform and store.

Email Marketing

As you begin to gain traffic on your website through alternative marketing tactics, you will most likely populate a database of followers. One way to do this is through a newsletter subscription where you can eventually implement exclusive offers or news regarding your niche and brand. Another is the avenue we are all striving for, through customer purchases.

Once you begin advertising to this audience, you will need to ensure you are legally complying with anti-spam laws in your given country of business. This will differ slightly depending on your region, however, below I have compiled a list of common elements that are often required under this legislation.

10 Best Practices for Legal Compliance:

1.     Customer opt-Ins.

2.     Do not use false or misleading header information.

3.     Do not use deceptive subject lines.

4.     Identify the message as an advertisement.

5.     Provide your address or location.

6.     Explain the opt-out process.

7.     Honor the opt-out request as soon as possible.

8.     Ensure to monitor what others do on your behalf.

9.     Store the consent information.

10.  Be aware of amendments and alterations to the policy!

Legal Issues Concerning Products

By far the easiest way to get into legal trouble in e-commerce, is to do so through selling products that you are not entitled to. Many people want to sell products that are popular at the time or have recognizable brands that already have a following.

In doing so, you are most likely to end up in a situation where it is going to cost you more in legal fees from being sued than you would ever make by dropshipping the product.

Infringement Scenarios

Trademark and Copyright

A trademark is defined as a symbol, word, or words that are legally registered or established for use by a representing company or product. Whereas copyright is the exclusive legal right, given to the originator to print, publish, perform, film, or record literary, artistic, or musical material, and to authorize others to do the same.

If that sounds similar, it’s because it is. The difference being is that each protects a different type of asset; trademarks help protect items that define brands such as logos, copyright helps to protect artistic and literary works such as music and books – both being forms of intellectual property.

Examples of trademarks that I see often on AliExpress and equivalent wholesale sites are those associated with sports teams and brands aligning with pop culture. As a fan, of course, you want to sell something you are interested in and enjoy being a part of… don’t.

You may like the New York Yankees (MLB), Seattle Seahawks (NFL), Toronto Maple Leafs (NHL), LA Lakers (NBA), or Manchester United (EPL) – however, you are simply not authorized to sell their products, especially when it comes from a non-authorized wholesaler, which it most likely does if you are sourcing overseas.

Other examples include toys and branded items such as Pokémon, or depictions of pop culture figures like Muhammad Ali or Marilyn Monroe.

Counterfeit, Replicas and Knockoffs

Leading from the topic above, there are a few different categories that you should know about when it comes to products that most likely involve one of the infringement scenarios outlined above. Knowing the difference is important, as there are differing legal repercussions, depending on how you may be involved.

As previously noted, these products are becoming more and more common due to the desire for quick and easy sales, as well as a rapidly developing ecosystem of the internet.

Counterfeit products are made to look exactly like an original product and thus infringe upon the trademark or in artistic cases the copyright. Customers often believe they are buying the original and therefore it is a deceptive practice that will result in a potential lawsuit, should they notice something is not right.

Since it is so difficult to tell the difference, this is the toughest of scenarios legally, should you get yourself involved. 

The next areas of consideration that you must avoid are replicas and knockoffs. In an attempt to get around counterfeit laws, manufacturers will often create products that are almost identical, minus say, the logo.

In doing so, in some cases, it is not necessarily illegal and they are less likely to be chased for infringement cases, however, the possibility is still very real and it is a deceptive practice towards the consumer. A recent example I’ve seen of this on AliExpress is a knock off of Apple’s AirPods.

In the event, you want to sell these products and nothing else, you must go about obtaining a Reseller’s License. In doing so, you will be able to access the manufacturers and wholesalers that have the legal authority to create, possess and distribute such products.

Restricted and Prohibited Products

Now that you know to stay away from products that may result in infringement cases, home free, right? Unfortunately, wrong – very wrong.

Within e-commerce, you still have to abide by laws pertaining to restricted and prohibited product categories. Some of the items within, you will see very consistently being sold, that said, it is either done with the proper credentials – or illegally.

Make sure to fully understand whether or not you have the right to sell within a certain product category before uploading the products to your store, or making any sales.

Restricted Products are legal to sell with the proper licensing. Some of the most common categories within this include liquor, medicine, and food items.

Licensing may be to ensure you have the proper manufacturing or distribution means and are handling your business in an ethical manner. Other reasons for restrictions include territorial rights, prohibition in certain jurisdictions, or the fact that they resemble other items and can be problematic for cross border scanners.

Prohibited products, on the other hand, are completely banned and should not even be on your radar as a potential for your store. Please keep in mind that depending on the country in which you plan to conduct business, the list of Restricted vs. Prohibited products may differ.

In some cases, items will flip from one list to another so it is always important to double-check. Common categories that will fall in under prohibited products include intellectual property infringements, weapons, cash, drugs, pornography, animals and plants, medical waste or poison, precious metals and stones, aerosol sprays, as well as anything illegal in the origin country or as outlined by the shipping company.

Final Thoughts on Legality in Dropshipping…

As you can see, there is a simple answer when it comes to is dropshipping legal… and obviously a much more complicated one. As long as you are consistently doing research and abiding by ethical business practices, you should be able to avoid negative consequences that could arise from the various situations above.

If it seems too good to be true, sometimes it is and it is important to conduct a little research to see if you have uncovered an amazing new strategy – or if you are testing the waters of the grey area.

A quick summary of the steps you can take in order to ensure you are operating legally and ethically with your e-commerce business is as follows:

1. Obtain a Business License: This will ultimately go a long way when it comes to taxation on your products and profits, as well as limiting your liability in the event an issue arises, all the while improving the legitimacy of your store in the eyes of consumers and suppliers.

2. Ensure you have Documents Outlining your Business Practices: This includes having a refund policy in place to deal with disgruntled customers, outlining your legal agreements and data usage, as well as any product and practice disclaimers you may require.

3. Practice Ethical Marketing: Utilize alternative platforms in the way they are intended, without manipulation of the rules. Make sure your marketing efforts when it comes to email abide by the legislation, as well as taking the customer perspective on your communications.

4. Focus on Appropriate Products: This is probably the easiest one to stay away from because you are beginning and in control. Find products that are unique and focus on solving a problem for your customers. You may think it would be fun to sell products associated with your favorite sports teams, movies, or brands in general due to high demand –  but it's illegal… just stay away from it.

Best of luck with your e-commerce adventure, whether you are a seasoned veteran or just getting started, I hope this information was thought-provoking and informative.

Again, please ensure to abide by these guidelines of ethical and legal operations – for the sake of the dropshipping community and the credibility of it!