Is Dropshipping Legal? Everything You Should Know (2024)

Dropshipping is a streamlined retail approach where online stores sell products without physically holding them. When a sale is made, the online store orders the product from a third-party supplier who ships it directly to the customer. While the products are sold under the retailer’s brand, they never touch the products.

This model’s key feature is its operational simplicity. The retailer focuses on marketing and customer service, while the supplier handles the logistics of manufacturing, storing and shipping products. When a product is sold, the retailer typically pays the supplier a wholesale price while charging the customer a retail price. Retailers profit from the markup. The typical profit margin for a dropshipping business is between 10% and 15%.

There are several types of dropshipping stores, but the most common are:

Print-on-Demand Products

Print-on-demand products include items such as custom T-shirts, mugs, posters and phone cases. Items are typically customized and printed after a customer places an order. Businesses such as Printful and Printify facilitate print-on-demand dropshipping services.

Fashion and Apparel

Fashion is the largest online shopping category worldwide. It is estimated consumers will spend more than $745 billion on fashion in 2024. Online stores can adopt dropship services across various sub-niches such as fitness apparel, formal wear, shoes, bags and jewelry. Curated supplier directories such as Spocket help keep dropshipping entrepreneurs up to date with the latest fashion trends without stocking inventory.

Electronics and Gadgets

After fashion, electronics is the second largest online shopping category. This category includes products such as smart devices, headphones, phone accessories, computer peripherals, wearables and cameras. Online businesses can benefit from the rapid growth and technological advancements in this sector by tapping into suppliers such as AliExpress and SaleHoo to expand their product catalog.

Home and Garden

This niche includes items related to home decoration, furniture, kitchen gadgets, bedding, gardening tools, lighting fixtures and outdoor equipment. Dropshipping these items allows online stores to easily expand their product lines without housing a large inventory of bulky products. Suppliers such as Sunrise Wholesale offer a range of home and garden products for dropshippers.

It is no surprise that so many people have jumped on the dropshipping bandwagon. Running a dropshipping store offers several advantages over managing a conventional e-commerce store. One of the main advantages is it allows owners to offload most of the sales details to their dropshipping partners. It allows dropshippers to earn a sustainable income from little output. Other advantages include:

Minimal Initial Investment

One of the biggest upfront costs of any traditional retail outlet is inventory. It can potentially take hundreds, thousands or millions of dollars to rent retail space and stock inventory. Because dropshipping allows entrepreneurs to launch a business without stocking any merchandise they can bypass much of the initial investment.

Reduced Operational Cost

Because dropshipper entrepreneurs do not need to buy their own inventory, they have no need to rent warehouse space to store that inventory. This significantly cuts down on expenses such as rent, utilities, insurance and staffing costs associated with managing a warehouse. Typically, the main recurring expense in dropshipping is the maintenance of an e-commerce platform.

Broad Product Range

Limited shelf space and the cost of inventory can restrict traditional retailers on the variety of products they offer. Dropshipping does not have these limitations, allowing businesses to offer a much wider variety of products. Businesses can easily expand into new lines or test new products without concern for unsold stock.

Location Independence

Traditional retail stores require a physical location. The disadvantages to brick-and-mortar stores are limited customer reach, lack of flexibility and additional costs. In contrast, dropshipping can be done from anywhere with an internet connection. This means businesses can reach a global market without the need for physical stores in multiple locations and business owners can live a digital nomad lifestyle if they so desire.

Dropshipping often seems so easy that some people mistakenly think it’s illegal. In reality, it is a perfectly legal and widely adopted retail strategy. However, like any business model, dropshipping comes with its own set of potential pitfalls that prospective entrepreneurs should be aware of before diving in.

Liability and Trademarking Issues

Although not common, the risk of legal liability issues with dropshipping is important to consider. Suppliers are not always as reputable as they appear. Challenges can arise when suppliers use trademarked logos or other companies’ intellectual property without authorization. This can inadvertently implicate dropshippers in legal disputes over intellectual property rights. Like any business, dropshippers can be sued for copyright violations even if it was not intentional. Careful selection of suppliers and thorough due diligence are essential to avoid these potential legal pitfalls in dropshipping.

Consumer Protection Laws

Dropshipping businesses must adhere to consumer protection laws regardless of their direct involvement in product manufacturing. These laws dictate that the retailer is accountable for ensuring the quality and safety of the goods delivered to consumers. If a product from a dropshipping business causes injury to a customer, the dropship business can be subject to personal injury litigation. This is why it is important for dropshipping businesses to carry comprehensive product liability insurance. The responsibility for ensuring consumer safety is another reason dropshipping businesses should be vigilant in their supplier selection.

Truth in Advertising

It is important to be aware of legal responsibilities with advertising. As a dropshipper, you are not involved in manufacturing the products, but you are responsible for how these products are represented in your marketing. Misrepresentation can lead to customer dissatisfaction and possible legal repercussions. It is important to make sure all advertising materials accurately reflect the products being sold.

Quality Control, Supply Chain and Customer Service

Since the dropshipping company never actually sees or handles the product, it can be difficult to ensure the products are of good quality. Suppliers might suddenly be unable to meet demand, making it impossible to fulfill orders. If customers are not satisfied, the dropshipper has to handle customer complaints and returns.

Low Profit Margins

While the overhead costs are relatively low, the returns are proportionately low. This means dropshipping businesses need a high volume of sales in order to be profitable. Operational expenses and maintaining competitive pricing often means sacrificing some of these already narrow margins. The model is particularly challenging for new e-commerce brands because building substantial traffic and a customer base can be a slow process.

Sales Tax Laws

If the dropshipper has what is called a nexus (a connection that creates a tax requirement) to the state where the sale to the customer is made, then the dropshipper is required to collect sales tax from the customer in the state where the product is received by the customer.

A sales tax nexus is usually established if the business owns real estate or has an office, employees or inventory in the state or if the business exceeds a certain amount of sales within the state per year. For example, in California, $500,000 in sales creates an economic nexus.

If a dropshipper is required to collect sales tax, they must obtain a sales tax certificate in that state and file sales tax returns.

To avoid paying sales tax to the supplier, the dropshipper must have a resale certificate that states they are reselling the goods and are exempt from having to pay sales tax on the purchase.

As mentioned above, choosing the right supplier is key to avoiding potential quality, legal and ethical issues in the future. Some strategies to pick quality suppliers include:

Research Supplier Quality

It is important to thoroughly research potential suppliers to make sure they are reputable and trustworthy. Check for customer testimonials, explore the supplier’s social media platforms and research their company on various dropshipping boards.

Analyze Shipping Options

Choose suppliers based on their location relative to your target market to reduce shipping times. Understand their shipping policies, fees and carriers used. Also, consider if they offer international shipping if your market is global.

Understand Types of Suppliers

It’s essential to recognize the differences between manufacturers and wholesalers. Manufacturers create products and might require bulk orders. Wholesalers buy in bulk from manufacturers and sell to retailers.

Have a Dropshipping Agreement Contract

A Dropshipping Agreement Contract is a legal document that outlines the terms between the online seller and their supplier. This contract is essential for defining key aspects including pricing, delivery standards and the handling of defective products. For a dropshipper, having such an agreement is important because it clarifies the responsibilities of each party in areas such as product quality, copyright liabilities and shipping. This agreement can protect the dropshipper in cases of customer dissatisfaction or legal issues related to product defects or misrepresentation.

Bottom Line

Dropshipping is a new e-commerce fulfillment model that is here to stay. Even if you have never heard of it, you have more than likely purchased a product from an online retail store that uses dropshipping to complete its orders. While, initially, it may seem too good to be true, it is a completely legal business model when following basic legal and ethical standards.