It’s a common misconception that dropshipping is illegal, but it’s not. As long as you are following certain practices and guidelines, then dropshipping can be done legally.
Dropshipping is an eCommerce practice in which you sell products without actually owning them or having them in your possession. It may seem like this would be against the law. But, in this blog post, we will discuss the misunderstood practices of eCommerce and explain how to go about doing things legally when it comes to dropshipping!
Legal Disclaimer: The information in this blog post is for educational purposes only. It does not constitute legal advice and will not create any type of attorney-client relationship. The author does not assume any legal liability, you are responsible for your own legal decisions. You should consult your own attorney before investing time or money into business ventures that may fall into any of the outlined topics.
Is dropshipping illegal?
Dropshipping is not an illegal business, as long as you do not conduct any ethical violations and follows good business practices.
What does that mean? Let’s go through the details.
Possible ethical violations in dropshipping
Since anyone can start dropshipping even for free, many people start this business without any understanding of fair business practices and credibility. Therefore, I have seen a lot of new sellers testing grey areas of ethical violations without thinking of any consequences.
When it comes to starting your own business, it is important that the business does not violate ethical practices. Dropshipping is no exception and as such should be considered carefully before execution.
For example, if an entrepreneur starts their dropshipping company with questionable intent like violating copyright laws by reselling copyrighted items belonging to others’ brands or trademarked goods illegally, then they are likely committing illegal acts which can lead them into trouble down the line.
Dropshipping itself is not inherently illegal, but there are many factors to take into consideration in order to avoid ethical violations.
Ethical violations are usually grey areas of doing business, and such situations can make you accountable for your actions. If you come across any grey areas when starting your dropshipping business that includes ethical violations or goes against a fair business practice, it is best not to test such situations. Always be a good neighbour in business.
Legal matters to consider when running a dropshipping business
The following legal matters may seem complicated at glance. But, there are simple ways to handle them. I’ll comeup with a separate article on that.
Do you need a business license to do dropshipping?
This is one of the most frequently asked questions when talking about the legality of dropshipping. The simple answer is “No”.
However, if you are planning on developing your business from a simple side-hustle to a serious full-time business, think about getting a license before developing your online store for dropshipping. It is technically not required, but it may be a good idea to do so regardless.
Paying taxes when dropshipping
Everybody hates paying taxes, even if they’re fair. Benjamin Franklin said it best: “There are only two things certain in life: DEATH and TAXES.”
There are two types of taxes you need to pay when dropshipping.
- Income tax
- Sales tax
Income tax is when you pay taxes on what your store makes in a year. That profit is the “income” of your business. In the US, it is common for citizens to pay taxes across both the federal government and their respective states.
Sales tax is the amount a governing body charges on goods or services sold within their jurisdiction. And, states in America are responsible for their own sales tax rates and rules.
Other liabilities in dropshipping
Product and personal liabilities
Dropshipping products from factories in other countries can lead to faulty items that may not be compliant with your country’s standards and regulations. Furthermore, you can also consider getting Product Liability Insurance if your business falls under the category of an independent contractor.
Pursuant to this form of insurance, in the case that a consumer has been injured or hospitalised due to a product sold by your dropshipping store, the company providing the product will be financially and legally liable rather than yourself.
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.
Having a good refund policy
Even though it is not legally required, 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.
Other legal agreements
Legal Issues Related to Dropshipping Products
Trademark and Copyright Infringement
Trademarks are symbols or words that can be legally registered by a company to represent its product. Copyrights protected the originator of literary, artistic, or musical material and allow for others to perform it but do not allow publishing without permission. So, you are not simply permitted to sell their products because they usually come from an unauthorized wholesaler.
Counterfeits and Replicas
Counterfeit goods are products that copy the look and feel of a legitimate item while reducing its quality and value. Consumers often buy these fakes because they believe they’re buying the original, which can result in legal action if noticing something is suspicious.
Restricted and Prohibited Products
Within eCommerce, you have to abide by certain laws– though this doesn’t mean that some activities are illegal. For example, Sellers may or may not have credentials for restricted product categories, and we all know how common those can be.
In conclusion, dropshipping is legal. However, continue research and abide by ethical business practices, and you should be able to avoid any negative consequences that arise from the various situations above.