AppScenic Ecommerce Blog

Is dropshipping legal and what are the risks of dropshipping?

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Let’s start by clearly specifying the following:

We are not legal professionals and so all this is not actual legal advice. If you want legal advice, we recommend finding an attorney specialized in this type of work. This article is about our personal experience and recommendations on how to start and build successful dropshipping stores.

Now, before actually opening a dropshipping business, you need to research all about it, from “what is dropshipping” to “is dropshipping legal” and “what are the risks behind it”.

Below, we will discuss the part about how legal it is to dropship and what are the actual risks of dropshipping. This is a long article so we hope you read it until the end as it has a lot of useful information for both beginners and experienced dropshippers. 

So, is dropshipping legal?

Short answer: Yes!

Now, the long answer is that owning and managing a dropshipping business is completely legal, but sure enough before starting a business like this you actually need to do your homework and find out what are the legal issues behind it, for example the ecommerce laws that apply to a specific location. 

So, be sure to check the specific rules of the country of your choice (or that of your target countries) before starting selling products online. Also, start by checking all the information you have available on common legal concerns and issues that dropshippers can come by. 

But, that’s something we’re going to talk about in the sections below.

Is dropshipping legal in the USA?

Again, yes, it is totally legal to dropship in the USA, but you need to follow some specific rules, such as:

  • Credit card & payment merchant facilities for dropshipping businesses are still under improvement
  • If you are a foreign-based dropshipping business then there are a few tax issues you need to be aware of
  • For dropshipping in the US, sellers need to have a USA Reseller Permit for online store owners based outside the USA
  • Dropshippers with stores based outside the USA cannot qualify for credit with US-based suppliers.

 

If you want to know more, we recommend reading additional information on how to have a USA dropshipping business.

Check this great article about how to set up a USA dropshipping business

Legal issues with dropshipping

Below we’re going to take one by one some of the most important legal issues behind dropshipping and how you can stay on top of them.

Restricted and Prohibited Products

The easiest way to stay away from this legal issue is to do thorough research before listing all the products in your store. 

First, find out what are the restricted and prohibited products in the country or countries you want to sell to.  

The difference between restricted and prohibited products is that the first requires a proper license in order to be sold. Standard restricted product categories include food, alcohol, or medicine.

Now, prohibited products are items banned in a specific country. As are gambling products or pirated content in the United Arab Emirates, for example. 

Trademark and Copyright

We know many of you are struggling with what is the difference between these two terms so below we will start by explaining what each of them means for you. 

A trademark can be a symbol, or a word(s) legally registered and used by a company or product. In other words, trademarks protect a brand’s name and the logos used to represent that product and service. Brands that have trademarks are Coca-Cola, Google or Disney, among many others, of course. 

On the other hand, having the copyright for something means that an entity, be it a company or a person, has the exclusive legal right to print, publish, perform, film, or record literary, artistic, or musical material, and to give others the right to do the same. Mostly, establishing copyrights protects a certain intellectual property, as are original artistic and literary works. 

So, as you can see these two terms are quite similar, but trademarks protect symbols that represent a brand, such as logos, and copyright helps to protect artistic and literary works, such as music and books.

We recommend that you don’t sell products coming from this type of brand if you are not sure the supplier has the legal rights for it and avoid trademark infringement. Try selling unique products instead. 

Counterfeits, Replicas, and Knockoffs

Counterfeits are those products manufactured to look like an original trending product, such as Louis Vuitton bags. Of course, you are not allowed to do such a thing, this comes in exact opposition to what we talked about before, such products will automatically infringe upon the authentic products’ trademark and artistic copyright. 

There are also replicas and knockoffs, products that are created to be similar to other trademark brands but don’t have the same logo, for example. Again, don’t sell these types of products, the manufacturer just wants to find a way around the counterfeit laws by making similar products with a slightly different logo or brand name. 

The fact is that selling counterfeit products is unethical and quite risky, you can either get negative customer reviews or be involved in a lawsuit. In any situation, we think this way of doing business isn’t worth it. 

Dropshipping legal requirements

Now, let’s talk a bit about some legal requirements you may have when starting a dropshipping business.

Business License

Do you need a business license? Well, it depends on how you plan to start your dropshipping business. 

So, if you want to have a Shopify, eBay or Amazon shop, then you don’t need a business license right away, but you would need one at some point.

It’s true that getting a business license means more work on your side if you think about the paperwork involved and the taxes you would need to fill in, but in the long term, it will also bring you many benefits, such as legal recognition and protection from certain liabilities.

And on top of everything, it may happen that some dropshipping platforms can request proof of business registration before approving you to publish and sell products on their marketplaces.

Taxes

The taxes that you have to pay depend as well on the business type you choose. So, if your business is considered a separate entity, such as a corporation is, then you need to pay business taxes separately from your personal taxes.

We recommend consulting a local tax lawyer or accountant if you want to know more about how taxes work and what you need to do when starting a dropshipping business. This will make it easier for you when you need to report your income and any business losses. 

Liability

If you choose to have a business that is separate from you, it will also protect you from liabilities that may come when you sell online. 

What does that mean exactly? Well, let’s say a customer claims that a product purchased from your store caused them harm, during the settlement your personal assets won’t be at stake. 

Another thing you should be aware of is that there are different types of licenses that provide different levels of protection.

Besides a business license, you should also think about going for product liability insurance. This will help cover compensation claims in case a customer sues your business, of course, in the worst-case scenario.

Legitimacy

Being recognized as a legitimate business can bring you many benefits and the most important one is that it will give you more credibility in the eyes of your audience. And this is something that every business owner should want. 

It will also open up some more opportunities for other business deals and more government support. If your country or local community recognizes your business, you have the chance to opt for certain programs built to help small businesses like yours grow and succeed. 

Is dropshipping from Amazon legal?

Yes, Amazon dropshipping is legal. It seems that an important percentage of Amazon’s sales are done through dropshipping. 

But, even though it’s legal to dropship from Amazon, you still have to be aware of a few things if you want to keep your online store open there:

  •  Avoid selling items that are copyrighted or fraudulent. You need to be extra careful about that as Amazon takes this policy seriously. If you fail to comply, it can lead to getting banned from the platform or even being sued.
  • Avoid listing products with an over-the-top markup that will probably give you negative reviews or, even worse, having your store removed by Amazon. 
  • Don’t drop surf, avoid shifting product offerings too often.

Again, we want to point out that if you respect Amazon rules (please go to their website and read in detail all their rules and regulations), your seller account won’t get suspended. 

So, if you’re out of stock and you don’t close your listings or when your products keep on arriving late, these are just some reasons for which Amazon will likely ban you.

Is dropshipping from Amazon to eBay legal?

Dropshipping on eBay is legal, but dropshipping from Amazon to eBay is not allowed. Here is what eBay is saying:

“However, listing an item on eBay and then purchasing the item from another retailer or marketplace that ships directly to your customer is not allowed on eBay. Activity that doesn’t follow eBay policy could result in a range of actions including but not limited to: administratively ending or canceling listings, hiding or demoting all listings from search results, lowering seller rating, buying or selling restrictions, loss of buyer or seller protection, and account suspension. All fees paid or payable in relation to listings or accounts on which we take any action will not be refunded or otherwise credited to your account.” (Source)

Now, just keep in mind that eBay allows dropshipping when you fulfill orders directly from a wholesale supplier. 

Is dropshipping from AliExpress legal?

Yes, dropshipping from AliExpress is legal too. You can definitely use the AliExpress suppliers’ platform and build your product catalog from there. 

There are many dropshippers that start their online business like this, but, as usual, we recommend doing extensive research, checking who are their suppliers, what are their shipping times, do they allow returns, and what are their terms and regulations to see if this is a platform that can work for your target audience. 

Is it legal to dropship branded products?

Yes, dropshipping branded products is completely legal. 

You only need to choose an approved wholesale vendor for those specific branded products and just start dropshipping those products through your online store. We actually recommend starting a dropshipping business by selling branded products if you find the right wholesale product suppliers.  This will give your business more credibility right from the start. 

What are the risks of dropshipping -  

We hope that now you know all about the legality of dropshipping and the risks behind it.

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