One of the most common questions out there about dropshipping is if it is legal. If you’re considering dropshipping, you’ve probably started to research the legality of dropshipping for your e-commerce store.
Before we get into whether dropshipping is legal, I want to clearly explain exactly what dropshipping is for most e-commerce businesses.
We are not legal professionals and do not give legal advice. For specific legal advice, please consult an attorney. The purpose of this article is to share our personal recommendations and experiences we’ve gained from helping thousands of entrepreneurs build highly-profitable dropship stores.
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What Is Dropshipping?
Dropshipping is an e-commerce model where the seller acts as a mediator. Instead of getting involved in the supply process, the seller is in charge of marketing a product (or products) to potential buyers. Once a customer purchases a product through a seller’s online store, the packaging, shipment, and delivery are outsourced to a third party supplier.
For more on this business model, we recommend that you check out our blog post entitled “What is Dropshipping?“
Is Dropshipping Legal?
Simply put, YES! Dropshipping is legal. It is a simple method of online order fulfillment that makes it easy for retailers to handle sales while a third party supplier handles shipping products to the retailer’s customers.
Dropshipping is extremely popular. Nearly every large retailer uses it as a method to fulfill customer orders, even online giants like Wayfair, Home Depot, and Amazon. However, there are a few dropshipping practices that are illegal and can get you and your business in trouble. That’s why it’s important to ensure that dropshipping is incorporated into your business model the right way.
The following dropshipping missteps are illegal and can seriously damage your business if you handle dropshipping this way.
Illegal Dropshipping Practices:
1. Selling Products You Aren’t Authorized To Sell
This is 100% illegal. Before you can set up dropshipping for a product, you need to get authorization from the supplier.
If you find a brand that makes excellent standing desks and you decide you’d like to sell them. So you create an e-commerce store and list that brand’s standing desk in your store. People start ordering those desks and you collect the money from those sales before you find a supplier to fulfill those orders. This is the kind of dropshipping that is illegal.
This is one of the most common pitfalls for anyone running an e-commerce store. Many store owners and entrepreneurs get excited about selling popular products represented by recognizable brands that already have a strong following.
However, if you don’t build a relationship with the brand and it’s suppliers, you may end up having to pay more in legal fees after being sued than you would ever make through dropshipping. It’s worth it to take your time and become an authorized seller first.
Solution: Become an authorized seller
In order to become an authorized seller, all you need to do is contact the suppliers of the products you want to sell. Do a little research to decide which brands you’d like to sell for, then contact them to ask how to set up a wholesale account.
You need to follow their process, complete the brand’s required paperwork and then you should be ready to sell as soon as they provide you with pricing information.
2. Not Paying Taxes
It should be obvious, but we’re still going to say it: not paying taxes is illegal. With dropshipping, just like with anything else you do professionally, you’re building a business. Keep track of any money coming into your e-commerce store and the amount of money going out.
Just like any other business, if you’re profitable, you have to pay taxes. It doesn’t matter if you’re running an online business instead of a brick and mortar store, you can’t avoid paying taxes.
Solution: Pay your taxes the right way
Be sure you consider both the sales tax required on your products as well as the required income tax on your profits. This can vary by state and tax laws can change from year to year, so make sure to ask an attorney who specializes in e-commerce tax law for help.
3. Selling Knockoffs
Misrepresenting an item as an original when it is a knockoff is completely illegal and selling fake items isn’t worth the risk. If you list a counterfeit item on most eCommerce platforms, your account can get flagged.
Even worse, if you get caught selling fake products, the producers of the original items could pursue legal action. You’ll have to remove the product from your store, potentially close your store completely, or pay a hefty fine. Taking all of those potential risks into consideration, selling knockoff products in your e-commerce store just isn’t worth it.
You want to sell Prada bags and you meet someone in downtown New York City that sells you cheap knockoffs of “Prada” bags for $100 each. Then you build an eCommerce Prada bag store and sell them. That’s completely illegal, and we never recommend dropshippers try anything like that.
According to Statistathese are some of the most commonly counterfeited items:
Beyond the risk of prosecution or having your e-commerce store shut down, there are many ethical reasons to avoid dropshipping counterfeit items. These types of products are usually inferior in quality to the original and some can even endanger the safety and health of your customers.
Not Exactly Illegal, But Be Careful!
These last few business practices aren’t strictly illegal, but can still get you and your business in trouble. Make sure you avoid this type of behavior to protect your business and your ability to dropship.
1. Neglecting your customers
Once a customer has completed a sale with you, don’t ignore them. Make sure you follow-up with confirmations and ensure your third party supplier and shipping company do the same. This will keep your customers happy and ensure that they know exactly when to expect their order to arrive.
2. Selling restricted products
What products are restricted for dropshipping? Items like supplements, or products whose marketing has any type of unverified claim associated with them are often restricted for dropshipping. Some of the most common products that most e-commerce stores cannot sell using dropshipping are liquor, medication, and food.
In some states, you may be legally allowed to sell products like this, but you need to make sure you’re doing it completely above board. Get the right authorizations for your industry and make sure you’re not just winging it, hoping it works out.
Some products are completely prohibited and you need to make sure to do your research to determine which products are off-limits for dropshipping in your state and/or country.
Some of the most common prohibited products are:
- Medical Waste
- Poisonous Substances
- Precious Stones and/or Metals
- Aerosol Sprays
Don’t Worry, Dropshipping Is Legal
Dropshipping is completely legal and many retailers use it to get products in the hands of their customers. But there is a right way and a wrong way to do it. Keep in mind that an e-commerce store using dropshipping is a real, legitimate business. Treat it that way by working with real brands that have authorized you to sell their products.