Is Dropshipping Legal? The Real Risk And Benefits of This Business

Written by Franklin Hatchett

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Our goal at EcomElites is to help readers get the information they need, we partner with companies to help bring you that information. If a purchase or signup is made through our partners, we receive compensation for the referral. Learn More

Starting a business entails paying attention to many details, especially ones that touch on legal matters. Probably you have heard of dropshipping business and asked yourself these questions: Is it legal? Is it a scam? These questions are justified.

Many of us have experienced or know someone who has experienced an online rip-off. Most people will be suspicious when you tell them you can start earning in just 30 minutes after setting up an online dropshipping business raising questions about the legality of such a business.

Yes. Dropshipping is legal. In this article, we are going to explore the possibilities the dropshipping business model has to offer as well as the legal challenges you may face.

Is Dropshipping Legal?

Dropshipping is legal. There are no laws in any jurisdiction or policies by any government organization that make the business unlawful. Dropshipping has only been regulated. You need to adhere to the regulations and policies of a country and the dropshipping platform you enroll with. eCommerce platforms such as eBay and AliExpress encourage dropshipping as it widens their customer base.

Is Dropshipping Legal on Major Online Platforms?

Different platforms have different rules for dropshipping. Let's discuss three major eCommerce platforms namely Amazon, eBay, and AliExpress.

Related: Dropshipping For Beginners: The Simple Step By Step Guide To Starting

1. Amazon

Amazon is the largest online retail platform. It has more than 5 million sellers, and its third party sales last year alone were worth $160 billion. It is sensible for dropshippers to consider leveraging its reach to attain their objectives. However, is dropshipping legal on Amazon?

Dropshipping is allowed on Amazon. Amazon does not allow you to dropship from suppliers such as Amazon itself or other sellers inside the platform. However, you can dropship from suppliers outside Amazon, provided you adhere to its strict terms and conditions.

To Dropship on Amazon, You Must Comply With These Terms

  • You cannot use Amazon's Fulfilment By Amazon (FBA) – Amazon only allows you to sell the items as “Merchant Fulfilled” products. You can only use FBA when the goods are in your possession. You will then ship them to Amazon warehouses for Fulfilment by Amazon. Consequently, your commodities are not eligible for Amazon Prime.
  • Your name must appear in receipts, tags, slips, and other documents as the seller of the product.
  • It would be best if you bore the responsibility of accepting and processing the items that customers return.

You can conduct dropshipping on Amazon when you comply with these terms. Other sellers on Amazon supply to the platform thus, you need your products from stores outside Amazon. Amazon will charge you a small fee for successful sales.

The percentage can be up to 15% of the gains from each sale. However, Amazon’s large customer reach gives you the chance to record high product turnover.

2. eBay

eBay allows you to dropship on its platform. You only have to create an account, find a reliable supplier, and start listing their goods on your eBay store before you start. Once you get a successful bid, you communicate the details of the bid to the supplier to initiate the delivery. However, eBay requires you to fulfill the delivery within 30 days.

Many entrepreneurs have complained about suppliers who fail to deliver as per the agreed terms. You must exercise scrutiny and caution to ensure the suppliers you are dealing with offer quality products and can deliver accordingly. You could end up with legal constraints when you fail to source carefully. Remember, you present yourself to the buyers as the seller.

Related: Is eBay Safe? Guide On How To Stay Safe For Buyers & Sellers

It's important to note that your customers can file a dispute with eBay if your suppliers fail to deliver. These conflicts can lead to eBay banning your shop from the platform. eBay is buyer protective and may make you compensate the buyers if you’re found guilty of flouting any of the set regulations leading to a dispute.

How Do I Find Reliable Suppliers To Avoid Legal Trouble?

Check their terms, reviews by past clients, and negotiate prices. Additionally, draft a comprehensive agreement with suppliers that ensures you have cover, and they take full liability for losses if they fail to deliver to your customers.

3. AliExpress

Dropshipping is legal on AliExpress. AliExpress is an excellent platform that connects buyers and dropshippers. It has a unique structure that supports dropshipping in two ways.

  • Dropshipping on AliExpress – Create a shop on AliExpress and use it as a distribution point to sell products from suppliers outside AliExpress. This method can only be used by Chinese citizens. It allows entrepreneurs to leverage the massive reach of AliExpress to sell to many customers.
  • Dropshipping From AliExpress –In this case, you create a self-owned e-commerce shop and use AliExpress as the supplier. Once a customer places an order, you contact the seller in AliExpress, and they deliver the products as per your terms. This option allows you to take advantage of the reliability of AliExpress sellers and the platform's protective measures.

Related: 7 Best AliExpress Alternatives For Dropshipping And The Best Deals

Is Dropshipping Legal in my Country?

As a law-abiding citizen, you need to know whether dropshipping is legal in your country or not before you get started. Dropshipping is legal in many countries. However, different countries have different rules that regulate dropshipping. Familiarize yourself with these policies to avoid getting into trouble.

1. Is Dropshipping Legal in the United States?

Yes, Dropshipping is legal in the US.

What Are the Legal Requirements for Dropshipping in The U.S.A?

  • Have a U.S.A Reseller Permit
  • Comply with the relevant tax laws, especially for dropshipping businesses from outside the US

2. Is Dropshipping Legal in the UK?

Yes, the UK has legalized dropshipping.

What Are the Legal Requirements for Dropshipping in The UK?

Every dropshipping business must do its VAT registration before they start selling to customers.

Areas That Can Cause Legal Problems in Dropshipping

Dropshipping is legal. However, there are specific areas in the dropshipping business that can cause legal challenges if you do not handle them with care. They include:

1. Licenses and Trademark

Some jurisdictions require you to have a license or registration certificate before you can conduct any e-commerce business such as dropshipping. You risk being fined when you fail to comply with these terms. You must comply with all the relevant copyright laws to avoid any infringements.

If you deal in products with trademarks, avoid making claims that they are your authentic inventions. You would be better to go private label if you ever got serious with dropshipping. Checkout the tutorial we wrote on private label products.

2. Management of Taxes

Some countries impose taxes on online businesses. You must know the tax liabilities for e-commerce ventures in your country before you start. You will use this knowledge to be tax compliant and avoid issues with taxing agencies. Tax evasion can result in hefty fines or even a jail term for you.

Ensure you settle all your tax liabilities to avoid these consequences once you gather the knowledge on the taxing systems. Pay close attention to the stipulations for local and foreign firms.

3. Selling Counterfeit Products

Trading in fake goods is illegal in all jurisdictions. Those guilty of distributing them face substantial penalties and jail terms. Suppliers can deceive you into selling counterfeit items as you do not come into contact with them.

You must pay close attention to ensure that the supplier you choose to deal with will supply original goods and does not cause you these problems. Ensure that they have the necessary quality assurance certifications.

4. Unreliable Suppliers

The agreement you enter into with buyers is binding. You must ensure that you adhere to all the terms of the contract. If your supplier fails to deliver as per your guidelines, customers will raise their issues with you. Some may cancel their orders and demand that you return their money.

Some may sue you for breaching the terms of your contract. Such inconveniences will only disrupt your operations and lead to financial losses. Therefore, the supplier you choose is critical for your service delivery.

Also See: The Ultimate Free Dropshipping Course

How Does Dropshipping Work?

Dropshipping uses a legal business structure. There are three main parties in the dropshipping business. The buyer, the seller/store, and the supplier.

The seller is the key link between the buyer and the supplier or manufacturer. Below is the process of how dropshipping works.

  1. The seller sets up an online store.
  2. The seller will select a product niche to dropship — for example, clothes.
  3. The seller will obtain the clothes from the supplier at a wholesale or near wholesale price.
  4. The seller will list the products using images and descriptions on their online store.
  5. The buyer will find an item they like and place an order.
  6. The seller will receive the order and payment.
  7. The seller forwards the order, buyer’s shipping address, and payment cut to the supplier.
  8. The supplier then ships the products directly to the buyer.
  9. The buyer will repeat this process for every order they receive and take a profit cut on the sales.

If you want to start your own store, read our tutorial here that show you how to build a store in 12 minutes!

Key Takeaway

Dropshipping is a legal business. You can do it on many platforms and in all the countries by adhering to the set rules and regulations. It would be best if you took care to avoid issues that can cause legal problems. Take time to familiarize yourself with the respective laws of the country you operate in. Additionally, it's essential to keep up to date with the rules guiding e-commerce businesses as they are always changing.

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