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Is Dropshipping Legal or Is Dropshipping Illegal?

By
Joshua Weatherwax
Table of Contents

After people ask, "what is drop shipping?" or “is dropshipping profitable”, another question we usually hear is, "is dropshipping legal?"

It may seem too good to be true to many when they learn how does dropshipping work and how to start a dropshipping business, but it's actually one of the fastest-growing types of eCommerce businesses.

Keep reading to learn about the legality of dropshipping, its legitimacy, and some tips on how to dropship properly.

Is Dropshipping Legal?

Yes, dropshipping is legal! However, there are many rules and laws limiting how and where you can use the dropshipping model. Make sure to look up the laws in your particular state to make sure your eCommerce business is legal (see what is e commerce).

Here are the most important things to ensure your dropshipping business is legal:

Acquire a Business License

In many states, if you run an online business without an eCommerce business license, you're not running a business legally. Failure to procure a license prior to operating can lead to massive fines, criminal charges, and even jail time. Make sure to look into the requirements of the state you live in as well as the platform you’ll sell on.You may also be required to incorporate your business. This is one of the first steps you should take when starting an eCommerce business to ensure you start off on the right foot. 

Pay Your Taxes

Once you get your business license set up, you'll also be issued an Employer Identification Number, or EIN. This number is used by the government to track your business for tax purposes. You'll need to make sure you pay all of these taxes, but also set up your storefront to automatically add state taxes to sales as well. This will ensure you aren't audited in the future and keep you from having to eat the taxes on your sales. Since dropshippers often use multiple suppliers, shipping and taxes on sales can get complicated. Invest in the right eCommerce software that can automatically calculate this for you.

Luckily, BlueCart eCommerce does just that. Our all-in-one marketplace handles taxation, eCommerce shipping calculations, payment processing, and more to get your storefront up and running, so you can sell DTC, B2B, or both in no time.

Get Business Insurance

Getting eCommerce business insurance doesn't necessarily make your business legal, but it protects it from many legal issues. If the products you sell get damaged in transit, hurt the consumer, or are otherwise faulty insurance can limit your liability. Many states also require you to have some form of insurance just to operate your business within their borders. So, pay attention to the local, state, and federal insurance guidelines when starting your business.

Don't Infringe Copyrights

Unfortunately, one of the most common legal issues among dropshippers is selling copyrighted products. This is due to the lax copyright laws in countries where a majority of products dropshippers sell are manufactured. Make sure you understand the laws surrounding copyrights and only go with suppliers you trust. Stick with wholesale directories to find wholesalers that offer products not limited by copyright laws. Even if you're not the one producing the products, you can be sued for selling them.

Is Dropshipping Legit?

Dropshipping is a totally legitimate business model, though there are unscrupulous businesses that use it. In the late 2010s, many startups adopted the dropshipping model in hopes of selling cheap products for a quick buck. This led many to ask, "Is dropshipping dead?"

To avoid any issues with legitimacy, do the following:

Focus on Branding

The way you present your dropshipping business to the world is key in showing your legitimacy. Having a professional eCommerce website and working with your supplier to add your logo to branded eCommerce packaging can go a long way. Even if you don’t create the products you sell, you still want your customers to connect your business with them.

Invest in an eCommerce Payment Gateway

Payment gateways are valuable tools that allow you to accept payment in many forms and process them safely and securely. Customers look for businesses that they can trust when making a purchase and having multiple options for payment shows that you’ve thought about the checkout process. It also keeps your customers’ data safe, so you don’t risk hackers stealing information from your servers.

Create a Shipping Policy

One of the biggest red flags for online shoppers is a site without an informational shipping page. When companies aren't open about their practices, it's harder to convert customers, and you're more likely to damage your reputation. Shipping policies are especially important for dropshippers as the dubious behavior of some has led customers to be wary of dropshipping businesses.

Keep Marketing Materials Truthful

Most dropshipping businesses are only as successful as their eCommerce marketing strategy. Stick with the facts about your products and sell your brand in a clear way. Though manipulative messaging can turn a quick profit, it will quickly lead to unhappy customers and a damaged business image. This is an area where many dropshippers have run into issues and even lost their businesses.

Pick Good Suppliers

Since the products dropshippers sell never touch their hands, it's more important than ever to work with a reputable supplier. Though you can easily find low-cost suppliers on an online marketplace, we recommend seeking out suppliers directly or using wholesaler directories. You're more likely to find high-quality wholesales items to sell and can establish a long-lasting relationship. This will be valuable as you scale your business and is a key part of how to make money dropshipping and increase eCommerce sales. You need to know how to find dropshipping suppliers that are reliable.

Is Dropshipping from Amazon Legal?

Yes, dropshipping from Amazon is legal. In fact, more than 30% of Amazon's sales each year are fulfilled through dropshipping. However, you still need to avoid a few things if you want to keep your storefront.

First, you'll need to avoid selling copyrighted or fraudulent items. Amazon takes this policy seriously, and you'll want to as well. Failure to comply can lead to being banned from the platform or being sued.

You also need to avoid listing products with an exaggerated markup to avoid negative reviews or having your store removed by Amazon. Make sure you understand the difference between markup vs margin when establishing pricing to avoid price gouging.

Keep It Legal

Dropshipping is a totally legal and legitimate form of eCommerce business. Follow the guidelines set out in your state and ensure the best customer experience to get the most out of your venture. For more information, check out our free drop shipping for dummies guide or try reading dropshipping books and taking dropshipping courses.