Is Dropshipping Legal? Everything You Need To Know

By Scott Voelker •  Updated: 05/13/23 •  8 min read

If you've ever wanted/thought about starting your own internet business but were put off by the high costs and complexity of stocking merchandise and shipping, dropshipping may be your best bet. 

This novel retail fulfillment solution enables you to sell things online without ever having to handle inventory or delivery logistics.

Dropshipping requires you to operate as a go-between for the customer and the supplier, accepting orders and transferring them to the supplier, who handles the rest. This means you can provide a wide choice of products without investing in inventory upfront, making it the ideal business model for ambitious entrepreneurs on a tight budget.

So What is Dropshipping?

Dropshipping is a retail fulfillment method in which an online store does not retain the things it sells. 

Instead, when a store sells an item, it buys it from a third-party supplier and has it transported directly to the customer. 

The seller never sees or handles the merchandise, making it a popular business model for entrepreneurs wishing to establish an Internet business with low initial costs. 

In a dropshipping model, the seller works as a ‘broker' between the customer and the supplier, receiving and processing orders and passing them on to the supplier, who handles inventory and shipping.

Dropshipping allows a wide range of products to be sold without the requirement for upfront inventory investment or the need to handle logistics. 

This business model may make it seem like an easy get-rich scam and thus leave you with the question of whether it's legal.

This is a question that many first-time sellers have is…is dropshipping legal?

Yes, it is; however, as a seller, you need to be aware of the laws and regulations of the state/country you're in. 

Some states in the US may impose a sales tax and other types of taxes if you sell products to residents of that state, and other states may not. 

How does dropshipping work?

People have doubts about whether this business model is legal because it's possible to generate a substantial amount of money from products you get from suppliers at much lower prices. 

Despite dropshipping seeming like an easy get-rich scheme, there's a lot that goes into it : 

Finding the right niche – dropshipping has been around for a while now. This means the competition can be stiff, so sellers need to do a lot of product research to come up with a list of potential products to sell. You can use various tools, join forums, and also, through social media channels like Instagram and Twitter, do polls and ask for feedback. 

Finding suppliers – before sellers can even think about creating a storefront, they need to find a reliable and trustworthy supplier. This will ensure that the products being sold are high quality and that they aren't getting scammed. This process can take anywhere from a few weeks to a few months. 

Creating the storefront – after you've found a supplier that you feel comfortable with, you still have to figure out where you will be selling your products.

If you are using sites like Shopify or Woo commerce, you have to build the storefront from the ground up. There are templates that you can use to assist with the process.

Additionally, if you plan on selling on a site like Amazon, you must follow certain rules to ensure that your store doesn't get shut down.

Legalities surrounding opening a dropshipping store 

People are understandably skeptical about this whole drop shipping business model. This may be because many people are familiar with dropshipping from sites such as AliExpress. While theoretically legal, there are some legal and ethical murky areas when using sites like these to start a dropshipping business.

Do you need a business license?

This is a yes and no situation. When you're just starting, it's common practice among lots of sellers not to have a business license. However, if you want to err on the side of caution and make things easier for yourself, get a business license, especially if you reside in the US. 

It will make it easier when filing taxes, prove that you're a legitimate business to your supplier, and protect you legally if a customer sues your business(which hopefully doesn't happen).

How to avoid liability?

If, As a dropshipping seller, you work with an international supplier, and despite your best efforts, you may find that a customer isn't is happy with a product. This may open you up to litigations and other court processes. As such, it's important to file for an LLC to protect yourself. Additionally, disclose information on refunds, terms and conditions, disclaimers, and privacy policy. You can have separate pages on your site, ensuring customers easily see them. A plus is that it will make your business processes much smoother. 

Have agreements with suppliers. 

Many dropshipping experts will tell you to have a legal agreement with the supplier/manufacturer. Even if they aren't international and they are located in your country. You can include several clauses, such as the supply of the products, pricing, and refund policy in case of a defective product. This will make it easier to handle any dispute with them in the future if the need arises and sort out any customer complaints. If a supplier/manufacturer refuses to sign an agreement, it's a surefire sign that they aren't to be trusted.

What about tax? Do I need to pay taxes? 

Yes, 100%. You break the law if you don't pay taxes on your dropshipping profits.

However, things can get a bit tricky when it comes to taxes and dropshipping. You can live in one country, sell to a consumer in another, and buy from another.

The tax implications of these jurisdictions vary greatly, and compliance is crucial if you want to succeed as a legitimate firm.

Taxes to consider include sales tax, income tax, and employment tax. Failure to meet your tax obligations might result in crippling fines and penalties.

It's important that you check with your lawyer on what taxes you may be required to pay to avoid litigation. 

Brown cardboxes in a VAN

Can I get sued for dropshipping?

Like any business, you could get sued for several reasons ranging from copyright violations to a faulty product. 

If your supplier sells copyright material, even if you weren't aware, this could get you in legal trouble. 

It's important that you take all the necessary measures, such as carrying product liability insurance if a product hurts a customer and proceed with caution. 

Risks associated with dropshipping

  1. Like any other business strategy, dropshipping has its own risks and obstacles. The following are some risks linked with dropshipping:
  2. Supplier issues: Your suppliers are the lifeblood of your business, and any problems with their dependability or quality can significantly influence your success. To reduce the risk of supplier concerns, its critical to thoroughly assess potential suppliers and create clear communication lines.
  3. Shipping and fulfillment issues: Because you rely on third-party providers to complete purchases, shipping, and fulfillment might be difficult. Shipping problems, late delivery, and damaged goods can negatively influence your customer satisfaction and reputation.
  4. Competition: Dropshipping is a popular business concept, and competition may be fierce. It's critical to thoroughly investigate your niche and competitors to develop a unique selling proposition that distinguishes your company.
  5. Legal and ethical issues: As with any business, there are legal and ethical factors to consider. These may involve concerns with intellectual property, client privacy, and advertising regulations.
  6. Cash flow management: Because you only get paid for an order after it has been placed, cash flow management can be difficult in the early stages of your organization.

Why start a dropshipping business?

There are several convincing reasons why someone might want to establish a dropshipping business:

  1. Dropshipping has low startup expenses compared to other business models, making it an accessible choice for entrepreneurs with limited capital.
  2. You don't have to bother purchasing and managing inventory when you use dropshipping. You save time and money because you don't have to bother about storing or delivering things.
  3. Dropshipping is an online business model, so you can run it from anywhere with an internet connection. This gives you the freedom to work from home or while abroad.
  4. Dropshipping allows you to scale your business as it grows effortlessly. You won't have to hire more employees or invest in more warehouse space to meet rising demand.
  5. Vast product selection: Because you are not limited by inventory, you can provide your customers with an extensive range of products. This can help attract more customers and enhance your revenue.

What products are good for dropshipping?

Some popular dropshipping products include

Bottom line 

In summary, dropshipping is a viable and popular option to establish an internet business with low risk and minimal upfront costs. You may construct a successful dropshipping business and attain financial independence by carefully picking the right items and suppliers and developing a sound marketing strategy.

Scott Voelker

Over the years I’ve helped thousands of people TAKE ACTION to UNLOCK their true potential on building their ultimate freedom business, by developing the skills to make them resilient, confident and FUTURE PROOF. I’ve clocked my 10,000 hours over the years working in the trenches myself and helping others build and grow their brands. I know the power in TAKING ACTION better than anyone and I’ve seen people lives changed as a result of it...including my OWN!