Dropshipping Legality and Risks: What You Need to Know Before Starting

Yes Dropshipping is Legal. Dropshipping is an ever-growing retailing business model within the e-commerce realm. Interest in dropshipping in the US alone grew 156% between 2022 and 2023 and now, dropshipping accounts for approximately a third of online stores. With those stats in mind, it’s safe to say that the popularity of dropshipping is generally only going one way - up and up!

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Aspiring online retail entrepreneurs, brace yourselves. We're about to dive into the intriguing world of dropshipping legalities. Before you align your brand with the dropshipping business model, it's crucial to familiarize yourself with the legal requirements of dropshipping, wherever in the world you’re operating. This comprehensive guidebook will equip you with the knowledge you need to understand the legal aspects of dropshipping.

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Dropshipping Business Model

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Dropshipping is a popular buzzword in the thriving ecommerce landscape. It offers an attractive business model where online store owners can wave goodbye to the hassles of product stocking and inventory management. Instead, they collaborate with suppliers who take care of storing, packing, and shipping the products to your customers.

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The process is pretty simple - the customer places an order through your online store, you forward the order details to the supplier, and then they prepare and ship the products directly to your customer. The retailer (in this scenario, that’s you) doesn't have to physically handle the products, making dropshipping a hassle-free process.

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In the vast ecommerce world, dropshipping plays a vital role. It enables online retailers to offer a diverse product range without any need for large upfront investments in inventory or storage space. This makes it a viable option for entrepreneurs who want to kickstart an online business with limited resources - also known as bootstrapping.

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Legal Considerations for Dropshipping

Dropshipping is a business model that enables entrepreneurs to sell products online, without the hassle of inventory management or order fulfillment. If you're contemplating starting a dropshipping business, it's crucial to familiarize yourself with the legalities surrounding this business model in your intended country of operation.

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When discussing the legality of dropshipping, it's important to note that dropshipping is legal. However, certain legal factors will need to be considered to ensure your business operations remain within the bounds of the law.

Key legal considerations for starting a dropshipping business include obtaining the necessary licenses and permits. Think about what products you intend to sell as you might need to acquire specific licenses or certifications. Researching and adhering to any regulations or restrictions relevant to your chosen niche will be mandatory if you want your business to succeed.

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It’s also essential to draw up proper agreements with your suppliers and your customers. This includes clear terms and conditions, privacy policies, and return policies. These agreements safeguard your business and will ultimately help you build trust with your customers.

There are also common legal misconceptions about dropshipping that you need to be aware of too. For example, some people believe that dropshipping allows them to sidestep taxes. Unfortunately, this is not the case. As a dropshipper, you will still be responsible for paying taxes on the profits you earn.

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In summary, dropshipping is legal, but understanding and complying with the legal considerations involved is essential. Ensure that your dropshipping business operates within the legal framework of your country of operation by getting any and all necessary licenses, having proper written agreements in place, and paying your taxes.

Key Players in Dropshipping

In the dropshipping business model, there are three key players: the suppliers; the retailers; and the customer. 

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As the dropshipper, you are the retailer. And as the retailer, it is your responsibility to accurately represent the goods you sell with factual product descriptions. Be warned - misleading your customer could lead to legal issues further down the line. 

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Suppliers also have legal obligations to uphold. Regardless of whether your supplier actually makes the products, it will need to abide by consumer protection laws. The supplier is responsible for ensuring the quality and safety of goods shipped to your customers. In the EU and the US that means producing products in-line with EU and US regulations. Luckily, at Spocket we can connect you with suppliers that have been approved as suppliers with this in mind.

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Then there’s the customer. Customers have certain rights which can vary from one country to the next. Generally, a customer is entitled to a product of satisfactory quality. This basically translates to the product not being damaged or faulty when it arrives. It must also be fit for purpose which means they should be able to use it as advertised. A basic example is that a pair of nail clippers must be able to clip nails.

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Product Sourcing and Quality Control

As you won’t actually be handling the products being shipped to your customers, product quality issues can arise in dropshipping. For those looking to develop their dropshipping brand, enhance awareness and generate positive customer reviews, ensuring product quality from your suppliers is as expected is super important. 

That’s where we can help out. All of our suppliers have passed rigorous tests on both their product and services. Every Spocket supplier has proven their products to be high-quality and in adherence with both EU and US standards

When it comes to dealing with defective or low-quality products, dropshipping can get a bit confusing. Simply put, this is what happens:

• Your dropshipping supplier will need to handle the physical aspects 
• You will need to handle the customer side of the scenario 

It’s worth knowing that some suppliers also won’t accept returns full stop. This could lead to you either having to bear the brunt of the customer’s negative reviews or being left out of pocket. Neither scenario is ideal. But dropshipping suppliers you’ve connected with through Spocket have all agreed to adhere to a minimum refund policy. This policy ensures they are able to replace or refund broken, incorrect, or missing items.

Implementing quality assurance protocols to minimize the risks posed by defective or damaged products is another essential process. 

Again, Spocket has simplified this process for dropshippers. Any supplier you link up with through our platform has proven their products to be of high-quality and meet US and EU expected standards. This means less time spent worrying about your customers receiving unsafe products.

Intellectual Property Concerns

When it comes to dropshipping, it's crucial to comply with all applicable laws and regulations. While dropshipping itself is legal, there are certain legal aspects that you need to consider. These include understanding consumer rights, intellectual property laws, product safety regulations, and data protection laws. It's advisable to consult with legal professionals or seek expert advice to ensure that your dropshipping business operates within the legal boundaries.

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Intellectual Property Rights (also known as IPR) is protection that provides certain exclusive rights to the creative aspects of that property. In this case, you’re the creator. Having IPR will enable you to retain any and all commercial benefits from your creative efforts or brand reputation. There are several different types of intellectual property protection a dropshipping business will need to consider including patent, copyright, and trademark. 

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Consumer Protection Laws

Consumer law protects customers against common ecommerce issues including fraud and mis-selling when a consumer purchases a product or service. Consumer markets - including dropshipping stores - have to abide by the rules and regulations that apply within their country of operation.

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These consumer protection laws also protect businesses against issues such as copyright infringement and intellectual property rights theft.

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Consumer protection is a collection of laws that have been passed to help protect consumers as individuals against the unfair selling practices across products, services and digital content. 

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Ensuring you maintain transparency and commit to ethical practices is essential for any business. And that includes dropshippers. It’s vital to establish clear communication channels, accept accountability, provide employee training (wherever applicable), and measure the effectiveness of your ethical practices. By doing all of these things, your dropshipping company can build and maintain trust with stakeholders, Google, and your customer base too.

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Ensuring transparency and ethical business practices starts with creating clear and concise shipping, returns, and privacy policies. And in doing so, you’ll boost brand awareness thanks to earning customer trust. You’ll also boost visibility of your dropshipping platform through better SERPs as Google begins to trust that you are a transparent and ethical dropshipping operation.

Payment and Transaction Security

Payment security is ensured by a series of systems, processes, and measures used to protect your customers’ financial transactions on your dropshipping sites. Unfortunately, without proper payment and transaction security, your customers will be at risk of unauthorized access, data breaches, and fraud. 

Ensuring payment security is important for maintaining customer confidence, regardless of whether you’re operating a bricks and mortar retailing service or an ecommerce one. Payment security helps to minimize financial losses for both your business and your customers. Plus, it’s an essential cog in the wheels of complying with relevant legal regulations and expected industry standards.

There are a few different types of payment security measures and technologies that you can choose to implement. Each helps to protect financial transactions and keep your customers’ sensitive data secure. Some of the most widely used types of payment and transaction security options include:

1. Encryption

Encryption protects sensitive customer data and financial transactions by encrypting the data. Basically your customer’s sensitive data is translated into incomprehensible data to prevent any unauthorized access, tampering, or theft of their actual. 

Within encryptions, there are two primary types: symmetric and asymmetric. Symmetric encryption uses a single key to both lock and unlock the data. Asymmetric encryption - which can also be referred to as public-key encryption - uses two keys. There is a public key for locking the data, and a private key that is used to unlock the data. Generally, asymmetric encryption is regarded as the more secure of the two encryption types as the private key is kept private (not shared).

Dropshipping businesses will need to employ strong encryption algorithms, current protocols, and proper key-management practices. With encryption, it’s important to keep key rotations regular and data storage systems secure. Regular assessments and updates to your encryption systems will be essential. This process help to identify and position you to be able to address any emerging threats. Maintaining the highest level of protection for your customers’ data needs to be a top priority.

Tokenization

Tokenization is a method of protecting your customers’ sensitive payment information by replacing that data with unique tokens that will have no intrinsic value should those tokens become compromised. 

This method deters fraudsters from stealing payment information by converting it to a format that if stolen would be useless. This helps to significantly reduce the risks posed by unauthorized access and data breaches. Tokenization also helps to maintain compliance with legal industry standards and regulations.

Authentication

Authentication is a primary payment security measure. It verifies the identity of users attempting to access or complete a transaction.

There are several different types of authentication available. We’re sure you’ll have encountered many of these before but some examples include:

• Single-factor authentication (SFA). This type of authentications only requires a form of identification (usually a password or a PIN).
• Two-factor authentication (2FA). Two-factor authentication is rising in popularity. This requires two forms of identification, for example a password and a one-time code sent to a registered device either via email or SMS.
• Multi-factor authentication (MFA). Multi-factor authentication requires three or more forms of identification. This could include biometric data, additional security questions, and more.

For dropshipping businesses, 2FA or MFA is a great way to improve payment security as it adds an extra layer of protection to the checkout process. In doing this, you’ll be able to better protect your customers against the threat of unauthorized transactions. 

Some of the typical authentication methods used within the payment processes include:

• Card verification value (CVV). This is requesting that customers confirm their payment details by inputting the three- or four-digit code that is printed on their physical credit and debit cards. Providing this during online or phone transactions can help to verify that they have physical possession of the card being used for payment.
• One-time password (OTP). OTPs are becoming increasingly popular in the financial sectors especially. This is the process of sending a unique, time-sensitive code to your customer’s registered device (either via SMS or an authentication app such as Google Photos). Your customer must then enter the code to authorize the transaction.
• Biometric authentication. While this is a fairly new technology when compared with the other two authentication methods, biometric authentication is employed by many brands across retail, finance, and services. Biometric authentication uses unique physical characteristics such as facial recognition, fingerprints, or iris scanning. This is generally a very secure way to verify your customer’s identity.

Each of these systems help dropshipping businesses identify and prevent fraudulent transactions. They monitor transaction patterns, customer behaviors, and other risk factors carefully. Other techniques like machine-learning algorithms, behavior analysis, and risk scoring can help to detect anomalies in behavior and minimize the risks of fraudulent activity.

Taxation in Dropshipping

Running a dropshipping store that turns a profit is the equivalent to running any other business. And like most other business activities, there are tax implications in dropshipping too. But, taxation will look slightly different depending on your country of operation.

In the UK, tax on goods and services is referred to as VAT (Value Added Tax). And in Australis, these additional charges are called GST (Goods and Service Tax). In the US, they do things a little differently. Instead of having a blanket tax for goods and services, the US uses state sales tax as a taxation method.

Given there are slightly altered nuances between one country and the next, it’s best to have an in depth look at the taxation laws that are in place in your primary operations country. Knowing the ins and outs of what you need to pay from the beginning of your dropshipping journey will help prevent you getting into legal battles or being hit with a hefty unexpected tax bill later on. 

Dropshipping Platforms and Policies

In dropshipping, there are also compliance rules for individual dropshipping platforms to contend with. Each platform has its own individual policies. And some of those policies will include legal considerations that will need to be taken into account. Let’s look at some of the biggest dropshipping platforms and their policies in a bit more detail.

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Shopify

Anyone dropshipping products through Shopify will need to comply with the laws and regulations applying to the sale of products as if they are the retailer of those goods. These laws and regulations can vary somewhat depending on the country or region where you are running your store from. They also apply to any laws and restrictions observed in the regions or countries you sell to.

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WooCommerce

WooCommerce is similar to Shopify. To continue operating your dropshipping store through WooCommerce, you will need to ensure that your business adheres to the laws and regulations that apply in both the country you are running your business from and the one you are shipping your orders to. If this is multiple countries, you’ll need to understand how the rules and regulations work in each of the countries you ship to.

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BigCommerce

Again, any dropshippers using the BigCommerce platforms will need to ensure compliance of all country-specific rules and regulations.

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Generally, most dropshipping platforms insist on this level of compliance. But, there are a few other things that you’ll need to comply with if using any of the above examples. These include:

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• PCI compliance (Payment Card Industry).  PCI and Data Security Standard (DSS) are commercial security standards that relate to handling of credit and debit card transactions. 
• COPPA (The Children’s Online Privacy Protection Act). Initially put into practice in 1998, the COPPA restricts the collection of personal information on websites for children under the age of 13. 
• GDPR/other privacy laws. In the European Union, the General Data Protection Regulation (GDPR) was put in place to regulate how companies process data and private information across the EU. And so, if your dropshipping business is EU based or does business in an EU country, there are stricter regulations on the handling of personal and credit card data you’ll need to comply with.
• Shipping regulations. Shipping can be quite complicated, especially when importing produces from international suppliers. Certain products, such as alcohol, fruits, knives and perishables, are restricted. Whether this is a restriction due to local laws or the shipping provider itself, you’ll need to be aware of which ones apply to you.
• Sales tax. Dropshippers operating in the US will find that sales taxes change across different states. But, it’s worth mentioning that these must be accurately included within the final charge. Failure to pay sales taxes in the US state where a product is sold will lead to significant financial penalties.
• Affiliate programs. Any affiliate programs you are working with must meet guidelines set out by the Federal Trade Commission around transparency. 
• Social advertising disclosures. If you’re using an influencer to boost your brand awareness, you’ll need to ensure that that influencer clearly states that their video or post includes paid advertisement.
• Content compliance. There are also legal restrictions concerning what businesses can say whenever making public claims. For example, a company selling smartphones can’t claim that their products will cure cancer. This means that you must maintain evidence-based claims surrounding your dropshipping products and be able back up those claims with appropriate evidence.

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Challenges and Risks in Dropshipping

As a dropshipper, identifying potential legal challenges is essential. Legal liability issues are bound to arise at some point given that some suppliers aren't as legitimate as they claim. One of the issues with partnering with a supplier who can’t comply with your legitimacy business needs is that you don't always know where the products come from. There’s also the issue of some suppliers illegally using a trademarked logo or another company's intellectual property. Unfortunately, this happens more often than it should.

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But mitigating the risks of partnering with the wrong supplier will lead to building a legally sound dropshipping business. And at Spocket, we have vetted our suppliers to ensure that you have access to reputable, reliable dropshipping suppliers. All of our partners have proven themselves able to adhere to the below rules and regulations of operating through the Spocket platform:

• A supplier’s products must be high-quality and meet both EU and US standards
• A supplier must have a good reputation and maintain it
• A supplier must be able to provide fast shipping and tracking information
• A supplier’s products must be competitively priced
• A supplier is required to maintain an order success rate of 95%
• A supplier is also required to answer any order inquiries 24-48 hours after shipment

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All of these measures are in place to prevent dropshippers using our platform partnering with unreliable suppliers. 

Legal Precedents and Case Studies

With Spocket, as long as you understand and have managed your legal liabilities and responsibilities as the retailer, you won’t have to worry about anything else. We remove the risks associated with suppliers by putting our partners through rigorous checks.

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By partnering with Spocket, one man earned $178,000+ in just three months by dropshipping dog products. And what about the working mum managed to earn $442,000+ by launching two dropshipping businesses in different niches - one focussed on women’s fashion and the other specializing in baby clothes and accessories? She put her trust in Spocket dropshipping suppliers and saw great success. But there’s also the case study of a student who earned $224,000+ by dropshipping with Spocket in just 3 months. Each of these success stories starts with finding the right suppliers to fulfill their business concept on a budget. 

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So, whichever niche you’re considering for your dropshipping business and wherever you may be launching your business, let these testimonies of success serve as a reminder that anything’s possible when you put your mind to it.

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Regulatory Compliance

Ensuring adherence to regional and international regulations is very important for dropshippers. You’ll need to know what regulations apply in the country or US state you are shipping to. And if you’re launching a multi-state or multinational dropshipping business, you’ll need to know the ins and outs of the regulations for each and every country you ship to.

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It’s also wise to remember to stay up to date on evolving legal requirements. International and interstate (in the US) regulations are ever-evolving and ever updating. You need to keep an ear to the ground where any regulatory compliance laws in the country you ship to are concerned.

Actively checking on regulatory compliance laws, rules and restricted products will help you avoid any liability issues.

Dropshipping and Competition Laws

Unfortunately, there are also antitrust considerations in dropshipping. Antitrust rules prohibit agreements from being made between market operators that would restrict competition. Therefore, you could find yourself in hot water with the law if you abuse your dominance.

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Balancing healthy competition and legal compliance is an art form. You need to be competitive if you want to survive in the world of dropshipping. But it’s also worth noting that if you find your dropshipping store in a dominant position, you’ll need to tread carefully. Having legal professions look over any contracts to ensure that you aren’t restricting competition would be a wise idea should your dropshipping store rise to such high levels of success.

Industry Standards and Best Practices

Adhering to ethical standards in the dropshipping industry is essential for businesses striving for continued success. Maintaining ethical dropshipping practices will help you achieve long-term success while bolstering the reputation of your brand. In following ethical guidelines, you’ll be able to further improve the overall integrity of the dropshipping business model. But you’ll also build trust between your brand and your customers too.

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Implementing best practices for legal success is a must. Here are the ethical best practices we’d recommend sticking to:

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• Transparency. Be open and honest with your dropshipping customers about where your products are sourced and your pricing strategy.
• Quality first. Ensure that the products you sell are of consistently high-quality. Partnering with Spocket can give you the peace of mind you need.
• Respect customer privacy. Don’t use the customer data you collect for any purposes that are not disclosed, agreed, or authorized by your customers. 
• Maintain fair pricing. Maintaining fair pricing practices is essential for establishing and building trust with your customers. Avoid entertaining morally wrong pricing fluctuations like increasing the prices just before a campaign to mislead your customers with a high comparison price. Acts such as this can damage your reputation and destroy the relationships you’ve built with your existing customer base. 
• Choose your suppliers wisely. Again, we can help with this. Choosing the right supplier is key. You’ll need a supplier that can offer speedy shipping, keep you up to date with stock levels, complete customs paperwork accurately, and maintain high order success rates. 
• Stay up to date and in compliance with legal obligations and regulations. Know the rules and regulations that apply within your shipping country or countries, state or states.

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Approaching dropshipping ethically does not just mean following the law. It also extends to being fair and respectful to both your customer base and any business partners too.

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Conclusion

When it comes to the legalities associated with dropshipping, there’s a long list of legal concerns to address. From ensuring your site and payment processing is secure and safe for customers to use, to adhering to the customs imports demands in different states or countries, we’d encourage you to maintain legal compliance at all times.

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Dropshippers are responsible for paying taxes and those taxes vary depending on which country you are shipping too. Do your research and you’ll set your business up to succeed. Remember to work within the ethical best practices guidelines too as this will help you build trust with your customers and scale up your business in an ethical way.

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But don’t be put off by the various legal issues you may have to navigate at one point or another. While it all might seem a little daunting right now, once you get your head around the legal rules and restrictions that apply to your business, you’ll be ready to get started on your dropshipping journey. And, as we’ve seen from the case studies mentioned earlier on, that can be a really fruitful journey indeed.

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