Is Dropshipping Legal? How To Avoid Pitfalls [2024]

Did you know you can earn a lot of money by running an online store that sells products globally without having to make or store them? Welcome to dropshipping, where online business owners make money by selling products they never physically handle. It sounds simple, which often leads people to wonder, "Is dropshipping legal?"

The answer is yes, dropshipping is legal. It's a great way to make money online, but like any business, it has its risks. However, if you take the right approach, dropshipping can still help you create a successful business.

In this article, we’ll explain how to make money with dropshipping and discuss the possible legal and ethical concerns that come with this business model.

What is Dropshipping?

Dropshipping is an easy way for online stores to sell products without keeping any in stock. When someone buys a product, the store orders it from a third-party supplier, who then sends it directly to the customer. Even though the products carry the store's brand, the retailer never actually handles them.

How Dropshipping Works: Choosing Products > Placing Orders > Supplier Shipping

(Image Source: VILAS)

• Choosing Products: Retailers select items to display in their online store.
• Placing Orders: When a customer makes a purchase, the retailer passes the details of order to the supplier.
• Supplier Shipping: The supplier packs and sends the product directly to the customer.

The main advantage of this model is how simple it is to operate. The retailer can focus on marketing and helping customers, while the supplier takes care of making, storing, and shipping the products. When a product is purchased, the retailer pays the supplier a lower price and sells it to the customer at a higher price, keeping the difference as profit. Usually, dropshipping businesses make a profit margin of about 15% to 20%.

There are different types of dropshipping stores, but the most popular ones include:

• Print-on-Demand Products
• Fashion and Apparel
• Electronics and Gadgets
• Home and Garden

Why Start a Dropshipping Business?

(Image Source: EComposer’s Template)

Dropshipping is a great option for new entrepreneurs wanting to start their own businesses. Here are some benefits of this business model:

• Low Startup Costs and Simple Supply Chain Management: Dropshipping allows you to avoid upfront costs for inventory and handling logistics. You can start selling without needing to make or store your own products.
• Low-Risk Business Model: You can add many products to your store without worrying about production or inventory costs. If a product isn’t selling well, it’s easy to replace it with another.
• Flexible Location: Since you don’t need to manage production, you can run your business from anywhere with an internet connection. However, you still need to keep in touch with your suppliers and customers.
• More Scalability: Because suppliers take care of shipping, you don’t have to stress about handling more orders as your business grows.

However, keep these points in mind before starting a dropshipping business:

• Less Control: Dropshippers depend on suppliers for creating, packaging, and delivering quality products. If there are issues like damaged items, poor packaging, or late deliveries, you won’t be able to fix them directly.
• Sudden Stock Shortages: Sometimes, suppliers may not notify you ahead of time if products run out. It’s important to check in with them regularly to avoid listing products that are unavailable in your store.

If you’ve already had the answer positively resonate with your passion and you are ready to face any challenges in this market, then let’s explore the detailed requirements and guidelines to start a successful dropshipping business.

Is Dropshipping Legal?

At first glance, dropshipping might seem illegal since you’re selling products you don’t own, but it’s completely legal, just like any other business. Even if you don’t have inventory, as long as you ensure the customer receives their product, everything is fine.

Just like any other business, dropshipping retailers must comply local, national, and international laws about selling products. Dropshipping is legal in the US and many other countries around the world. We haven't come across any country where this business model is banned.

As long as the rules are followed, dropshipping is a low-risk way to run a business, with minimal personal or product liability. It might be a good idea to have a lawyer review any legal agreements you make with your dropshipping partners and suppliers. It can help clarify who is responsible for any issues that come up during sales, shipping, or when customers use the products.

But is that everything? Not at all. There are several important things needed to be considered.

Legal Compliance in Dropshipping

Here are some important legal issues to consider when starting your dropshipping business:

1. Copyright Laws

Many new e-commerce sellers wonder, “Can I get sued for dropshipping?” Just like any business, you can be sued for various reasons, including copyright violations. You risk breaking copyright laws if your supplier sells fake goods to fulfill your customer orders. Be careful when choosing suppliers and take any ethical concerns seriously.

2. Consumer Protection Laws

Even if you don’t make the products, your online business must follow consumer protection laws and take a response for the quality and safety of the items you sell. If a product you sell causes harm, you could be sued for personal injury, so it’s wise to have product liability insurance.

3. Truth in Advertising Laws

Dropshippers must accurately represent their products in all marketing. If unhappy customers receive a misrepresented product from a dropshipping store, they are unlikely to sue the supplier; instead, they’ll probably sue the business name on the package.

4. Licensing Laws

Like any retailer, many states request for a business license or sales permit to run a retail business, as well as dropshipping. If you're unsure about licensing requirements in your area, consult a local legal professional.

Potential Risks and Best Practices for Dropshipping

1. Choosing Unreliable Suppliers

One of the biggest risks in dropshipping is depending on unreliable suppliers. Since you don’t handle products directly, your business depends entirely on your suppliers to manage inventory, ship orders, and maintain product quality. When a supplier misses a delivery date or sends low-quality items, it reflects poorly on your business, even though you’re not directly at fault. All can lead to unhappy customers, bad reviews, and even financial losses.

Consequences of Unreliable Suppliers

• Customer Dissatisfaction: Late deliveries or poor product quality upset customers, damaging your business’s reputation.
• Increased Returns: Poor-quality items often lead to returns, straining finances and customer trust.
• Negative Reviews: Customers may leave bad reviews online if they’ve had a bad experience, which could discourage new customers from buying.

How to Avoid This Risk

• Research Suppliers Thoroughly: Check out suppliers’ reputations by reading customer reviews and analyzing performance history. Tools like Koala Inspector can help assess supplier reliability.
• Order Samples First: Check the quality of the products and shipping times by ordering samples from the supplier before making a commitment.
• Have Backup Suppliers: Keep alternative suppliers ready in case your main supplier falls short, ensuring your business doesn’t miss a beat.
• Use Trusted Directories: Rely on verified supplier directories for a list of reputable suppliers.
• Stay in Contact: Build a clear line of communication with suppliers to keep track of their stock and operations, so you can manage customer expectations effectively.

When taking all these steps, you can reduce the chances of issues with unreliable suppliers, helping build a positive and trustworthy dropshipping business.

2. Legal Issues with Trademarks or Copyrights

One major risk in dropshipping is running into legal problems with trademarks and copyrights. Because dropshippers sell products they don’t create or stock themselves, they need to be careful about intellectual property laws to avoid infringing on someone else’s rights. Ignoring these laws can cause serious legal issues, including lawsuits and fines.

Understanding Copyright and Trademark Laws

• Copyright: Protects original works like images, videos, and text. For example, using a copyrighted product photo or description without permission violates copyright laws and can lead to fines that range from $750 to $30,000 per infringement.
• Trademark: Protects brand identifiers like logos, names, and slogans. Using a trademarked logo or brand name with no permission—for instance, selling products with a famous brand’s logo—could result in a lawsuit for trademark infringement.

Common Legal Pitfalls

• Unlicensed Images and Text: Some dropshippers use photos or descriptions provided by suppliers without permission, which could lead to copyright claims. To avoid this, create unique content for your listings.
• Selling Counterfeit Products: Selling fake or “knockoff” items violates trademark laws, damages trust with customers, and could lead to severe legal consequences.
• Misleading Advertising: Misrepresenting products with false claims or inaccurate descriptions can lead to legal trouble under consumer protection laws. Make sure product listings are clear and truthful.

Mitigating Legal Risks

• Do Your Research: Check that products you sell don’t violate existing trademarks or copyrights. Resources like the USPTO’s Trademark Electronic Search System (TESS) can help identify potential conflicts.
• Choose Trustworthy Suppliers: Work with suppliers who respect intellectual property laws. This helps ensure you’re not unknowingly selling items that violate these laws.
• Create Unique Content: Write your own product descriptions and create original marketing materials. This not only prevents legal issues but also improves SEO and customer engagement.
• Seek Legal Advice: Looking for consultants or an intellectual property lawyer can give you helpful guidance on how to follow trademark and copyright laws.

Remember to understand all and respect intellectual property laws, then you can avoid potential legal problems and build a reputable brand in the marketplace.

3. Challenges with Sales Tax Collection 

Collecting sales tax is a crucial part of running a dropshipping business, but it can get complicated due to multiple parties involved. Here’s a look at the main risks and tips to help stay compliant.

Potential Risks

• Determining Nexus: "Nexus" is the link between your business and a state, requiring you to collect sales tax there. Nexus can be based on physical presence, like an office, or economic presence, like a certain sales level. Misunderstanding where you have nexus can lead to penalties if taxes aren't collected properly.
• Incorrect Sales Tax Charges: Charging the wrong amount of sales tax due to customer location can lead to legal trouble. For example, if you have nexus in a state but don’t collect the required tax from customers there, you may be responsible for unpaid taxes.
• Supplier Sales Tax Responsibility: Dropshippers need to clarify whether they or their suppliers should collect sales tax. If a supplier doesn’t accept resale certificates or if you don’t provide one, you might end up paying unexpected sales tax.

Best Practices for Sales Tax Collection

• Register for Sales Tax Permits: Register in states where you have nexus to get the necessary permits.
• Use Automated Solutions: Sales tax software can automatically calculate rates based on shipping addresses and help manage resale certificates.
• Consult Tax Professionals: A tax professional familiar with e-commerce can help you stay compliant and avoid penalties.
• Keep Detailed Records: Track all transactions, including collected taxes and resale certificates, to ensure smooth audits and meet state regulations.

By following these practices, dropshippers can stay on top of sales tax obligations and keep their business running smoothly.

4. Shipping Delays and Customer Complaints

Shipping delays can be a major issue in dropshipping, often leading to unhappy customers and more complaints. Since dropshippers depend on third-party suppliers to handle orders and shipping, any hold-ups on the supplier’s end directly impact customer satisfaction. Managing and communicating about potential delays is essential to keep customers happy and loyal.

Causes of Shipping Delays

• Supplier Processing Times: Each supplier has its own schedule for preparing and shipping orders. Some suppliers may be quick and process orders in a few days, while others could take up to two weeks, causing unpredictable wait times for customers.
• Shipping Methods: The chosen shipping method can greatly affect delivery time. Many overseas suppliers, like those on AliExpress, may take anywhere from 15 to 60 days for standard shipping. Customers used to quicker delivery, such as Amazon’s one- or two-day shipping, might find these longer timelines frustrating.
• External Factors: Customs processing, bad weather, and unexpected events (such as global pandemics) can add further delays that are beyond the dropshipper’s control.

Impact on Customer Experience

• Increased Refund Requests: Long wait times can frustrate customers, leading them to request refunds or cancel orders, impacting both sales and the time needed to handle returns.
• Negative Reviews and Reputation Damage: Customers disappointed by delayed shipping may leave negative reviews online, which can hurt the business’s reputation, especially since online reviews strongly influence buying decisions.
• Customer Service Strain: Delays lead to more customers asking about their orders, which can overwhelm customer service. Managing these inquiries effectively takes time and resources, pulling focus from other business needs.

Strategies to Manage Shipping Delays

• Transparent Communication: Be upfront about shipping times on product pages and at checkout. When customers know what to expect, they’re less likely to feel frustrated by delays.
• Choose Reliable Suppliers: Work with suppliers that have a track record of timely order processing and consistent delivery. Check reviews and performance metrics to find partners you can rely on.
• Offer Tracking Information: Providing tracking information allows customers to see where their order is, easing concerns about delays. Regular updates about any extended delays can also help maintain trust.
• Optimize Shipping Methods: Whenever possible, choose faster shipping options, such as ePacket, for international orders. This option is usually quicker and more reliable than standard overseas shipping.

Duration for shipping is very important. Dropshippers should let customers know the time they might receive their items to meet their demand. Therefore, minimizing the challenges associated with shipping delays is a must, it provides a better customer experience that builds trust and keeps shoppers coming back.

5. Online Marketplace Policies

Dropshipping can be a profitable business model, but it also requires following the specific rules of each online marketplace. Every platform has its own guidelines for dropshipping, and not following them could lead to account suspensions or bans. Knowing these policies is essential for running a successful dropshipping business.

Key Marketplace Policies

• Amazon: Dropshipping on Amazon is allowed, but you must be listed as the official seller for each product. It means you handle all parts of the sale, including customer service and returns. Suppliers should not include their own branding or packaging with products shipped to Amazon customers. Violating these policies could cause account suspension or termination.
• eBay: eBay permits dropshipping only if you have an agreement with the supplier and if items listed are in your inventory or pre arranged with the supplier. eBay prohibits ordering from other retailers to fulfill orders, emphasizing that sellers must manage their stock and ensure timely delivery.
• Etsy: Dropshipping is permitted on Etsy under strict conditions—sellers must disclose production partners and ensure products meet Etsy’s handmade or vintage criteria. Mass-produced items with no personal touch are generally not allowed.
• Shopify & Social Media: Shopify supports dropshipping and offers integrations, but sellers must follow local business laws and consumer rights regulations. Social platforms like Facebook and Instagram allow dropshipping but require clear communication about business practices and product sources.

 

Risks of Non-Compliance Failing to follow marketplace rules can lead to serious issues:

• Account Suspension or Termination: Marketplaces actively monitor sellers for rule violations, and failing to comply can result in suspension or even a permanent ban.
• Lost Sales: A suspended account means missed sales opportunities, which can hurt your revenue.
• Reputation Damage: Poor experiences due to policy violations may result in bad reviews, impacting your reputation across platforms.

Best Practices for Compliance To avoid these issues, consider the following practices:

• Understand the Policies: Review each platform’s terms and dropshipping guidelines before listing products.
• Keep Listings Accurate: Ensure that product descriptions are accurate and meet platform guidelines on images and details.
• Coordinate with Suppliers: Set clear expectations with suppliers about shipping, packaging, and branding to stay compliant.
• Monitor Performance: Regularly check your account health to catch potential issues early.

Following these guidelines helps dropshippers reduce the risks of non-compliance, which supports a smoother, more reliable business operation and keeps customer satisfaction high.

6. Failure to Follow Consumer Protection Laws

Dropshipping can be a profitable business, but it has risks that need careful handling. Knowing these risks and following best practices can help dropshippers succeed while avoiding legal and reputation issues.

Key Risks

Dropshippers must follow consumer protection laws that protect customer rights and promote fair business practices. Ignoring these rules can lead to fines, lawsuits, and harm to your reputation. Important areas to focus on include:

• Authenticity in Advertising: The Federal Trade Commission (FTC) requires that all advertisements be truthful. Misleading claims can lead to penalties.
• Product Safety Standards: Dropshippers must ensure products meet safety standards, like those set by Consumer Product Safety Commission (CPSC) in the U.S. If a product causes harm, dropshippers can be held responsible.
• Return and Refund Policies: Many places require clear return policies. Not informing customers about their rights could lead to legal trouble.
• Data Protection Issues: With strict privacy laws like GDPR in Europe and CCPA in California, dropshippers must protect customer data. Failing to do so can result in fines and loss of trust.
• Responsibility for Product Quality: Even though dropshippers don’t handle products directly, they’re responsible for quality. If a product is faulty or harmful, they can face personal injury claims.

Best Practices for Consumer Protection 

• Develop Clear Policies: Ensure that your website has easy-to-access policies on returns, refunds, shipping, and data usage.
• Conduct Supplier Due Diligence: Check your suppliers carefully to make sure they meet safety standards and offer quality products, requesting certifications when needed.
• Train Customer Service Staff: Make sure your customer service team is knowledgeable about consumer rights and your policies to handle questions and complaints effectively.
• Stay Informed on Regulations: Regularly review updates to consumer protection laws that might relate to your business. Consulting with e-commerce legal professionals can also help you stay compliant.

Following these guidelines allows dropshippers to build a trustworthy business, keep customers satisfied, and avoid legal issues.

7. Lack of Proper Contracts

Dropshipping can be a profitable business model, but it also comes with certain risks that need to be carefully managed. Having clear contracts is essential to protect your interests and to create smooth partnerships with suppliers.

Key Risks

• Unclear Supplier Roles Without a clear agreement, roles and responsibilities can get mixed up, leading to confusion, disruptions in operations, unhappy customers, and potential legal issues.
• Liability Concerns If no clear terms are set, dropshippers could be held responsible for issues like product defects or shipping delays. This can lead to legal problems if products don’t meet safety standards or cause harm.
• Financial Risks Unclear pricing and payment terms may lead to unexpected costs or payment disputes. This uncertainty can strain supplier relationships and impact profits.

Key Components of a Dropshipping Agreement

• Roles and Responsibilities
• Pricing Structure
• Shipping and Delivery Terms
• Return and Refund Policies
• Intellectual Property Rights
• Confidentiality Clauses
• Termination Conditions
• Dispute Resolution

Best Practices for Implementing Contracts

• Consult Legal Professionals: Before finalizing, consult a lawyer experienced in e-commerce to ensure contracts comply with laws and protect your interests.
• Keep Contracts Accessible: Store signed contracts securely and accessibly to review each party’s obligations anytime.
• Regularly Review Agreements: As your business grows or laws change, review and update contracts to stay current.

Using comprehensive contracts helps you set clear expectations, minimize risks, and create a stable foundation for your dropshipping business.

How to Start a Dropshipping Business on Shopify Legally and Ethically

(Image Source: EComposer’s Template)

Starting a dropshipping business on Shopify requires a few key steps to make sure it’s both legal and ethical. By following best practices, you can build a trustworthy online store that follows relevant laws and regulations.

1. Create Your Shopify Store

First and foremost, signing up for a Shopify account, which provides a simple setup for creating your online store. During this setup, you will:

• Choose a Domain Name: Pick a name that most fits your brand and is easy for customers to remember.
• Customize Your Store: Use Shopify’s design tools and themes to make your store visually appealing. Set up product pages, navigation menus, and checkout options to complete your storefront.

 

2. Select Reliable Dropshipping Suppliers

Choosing reliable suppliers is crucial for ensuring product quality and customer satisfaction. Here’s how to find dependable partners:

• Use Dropshipping Apps: Shopify offers apps like DSers, Spocket, and Oberlo that connect you with suppliers. These apps help you import products to your store and automate order fulfillment.
• Check Supplier Quality: Look for suppliers with good reviews, dependable shipping times, and quality products to avoid issues with customers.

Others also read

Comprehensive Guide To Find A Dropshipping Supplier

How to set up shipping on Shopify for Dropshipping

17 Best Tips For Dropshipping To Maximize Profits

3. Comply Legal Requirements, Policies and Practices

Starting a dropshipping business on Shopify legally and ethically means following specific legal requirements, policies, and practices. Like mentioning above on risks and best practices to avoid further issues, it’s the same with Shopify:

• Get any licenses and permits you need, which depend on your location and the types of products you sell.
• You’ll need to register for a sales tax permit to handle tax collection properly if your products require sales tax.
• Follow consumer protection laws to use honest product descriptions that match truth-in-advertising standards, so customers know exactly what they’re buying. 
• Partner with trustworthy suppliers to ensure your products are safe and meet quality standards. 
• Clear return and refund policies help manage customer expectations and protect your business if issues arise. 

To understand more about How to Start a Dropshipping business from scratch, you can find the information in our blog.

* Note: For information specific to your country and situation, please seek independent legal advice. EComposer is not responsible for your use of or reliance on these guides.

To sell products on Shopify, make sure you follow the laws in both your business’s location and where your customers are based, as well as Shopify's Terms of Service, Acceptable Use Policy, and any other relevant policies.

Wrap Up

Dropshipping is a legitimate way to earn income, but like any eCommerce business, it comes with certain legal responsibilities. 

As your dropshipping business grows, you'll need to establish a company, handle your taxes, and follow the same laws as any other business. It’s best to protect your business—and yourself—by setting it up with the essential legal requirements for dropshipping.

We hope that our blog has helped you clear on whether or not dropshipping is legal and supported you in making better choices as you pursue your entrepreneurial goals.

FAQs

1. Do you need a license for dropshipping?

Typically, you don’t need a special license to start a dropshipping business. However, depending on where you are and what you sell, you might need certain permits or licenses. For example, if you sell food or drinks, health permits may be necessary. It's best to check with local authorities to make sure you’re following all the relevant rules.

2. Is dropshipping illegal on Amazon?

No, dropshipping is legal on Amazon. However, Amazon has specific rules about how to source products and fulfill orders. It’s important to follow these rules to avoid getting your account suspended.

3. Why do dropshippers get banned?

Dropshippers can be banned from platforms like Amazon, eBay, or Shopify for several reasons, including:

• Policy Violations: Not following platform rules about product authenticity, shipping times, or customer service.
• Intellectual Property Infringement: Selling items that violate copyright or trademark laws.
• Price Manipulation: Engaging in unfair pricing practices.
• Negative Customer Experiences: Getting a lot of negative reviews or complaints.

4. Is dropshipping legal under 18?

There isn't a specific age limit for starting a dropshipping business, but it's important to think about the legal aspects of running a business, especially regarding contracts, taxes, and money matters. In many places, minors may need permission from a parent or guardian to enter into contracts. It's a good idea to talk to a legal expert to understand the specific rules in your area.