Is Dropshipping Legal? Laws and Regulations for Solopreneurs

So, you want to get into the dropshipping business, huh? There are already millions of successful dropshippers, so why not one more?

Before you set up shop in a virtual space, you need to wholly understand the legal framework surrounding dropshipping businesses. I’m talking about everything from licenses and registrations to tax obligations, contractual agreements, privacy protection, and the whole nine.

It’s okay if you don’t understand how any of this works yet because you will know by the time you’re done reading.

So, is dropshipping legal? In this blog post, we’ll explore that, as well as the rules, regulations, and compliance surrounding dropshipping.

Table of Contents

Key Takeaways

Running a dropshipping business requires careful consideration of the existing laws, everything from marketing and advertising compliance to privacy and data protection regulations, intellectual property rights, consumer protection laws, and business registrations.
Familiarizing yourself with the laws and ensuring compliance will set up your dropshipping business to succeed.

Business Registrations and Licenses

Before your dropshipping business can proceed any further, you must get your registration and license squared away.

Business registrations 101

Most businesses must register, but it depends on your chosen business structure and location.

Registering your business legitimizes it, which can help when seeking loans. Further, you get more tax benefits and can identify your business exclusively as your own, so it’s worth doing.

To register, first, you must select a business structure, with options including a limited liability company or LLC, a C or S corporation, a partnership, or a sole proprietorship.

Next, pick a business name, then obtain an Employer Identification Number or EIN. Research the state agencies in your area, as your state government will likely require you to register with them. That said, the requirements vary by state.

You may be obligated to pay fees, so be prepared for that. The fee varies by state but may cost $100 and up.

Before you’re finished, you need to get a business license (more on that in just a moment) and potentially insurance as well, from workers’ comp to liability insurance.

What is a business license, and does your dropshipping business need one?

Okay, so let’s backtrack for a minute and discuss business licenses. These government permits are legal allowances to pick, pack, and ship orders (or commit any other business level).

However, licenses apply to specific areas only, and sometimes they’re not statewide. Sometimes, you may need a license based on the city or county.

I’m sure it won’t surprise you to learn that business licenses aren’t free. They cost about as much as business registration, although they can sometimes be even more inexpensive.

Tax Obligations

Once you register your dropshipping business, you have officially become obligated to take care of business taxes. Bearing that in mind, let’s review how sales tax requirements work in various regions.

US sales tax: Known as indirect taxes, the United States sales tax varies by state, and not all states nationwide have sales taxes. Oregon, New Hampshire, Alaska, Montana, and Delaware don’t. The taxes apply when selling services and goods.
VAT tax: Value-added taxes or VATs are used throughout Europe. The consumption tax applies throughout the manufacturing and distribution processes at various stages. As a product seller, you charge your customers VAT taxes, but the fee goes toward the European government.
JCT tax: The Japanese Consumption Tax or JCT is used throughout Japan for services. The tax is up to 10% and is factored into the overall cost of a service.
GST tax: In India, the Goods and Service Tax (GST) applies to many domestic services and goods. It works as a VAT tax.

How to handle tax collection and remittance

Although your customers pay sales taxes, you should keep a record of them, as you must submit them when you pay your federal income taxes.

Remitting your tax to your state may sometimes require you to have a resale exemption certificate.

What is nexus? How does it affect taxes?

Oh, and I also have to talk about the sales tax nexus and how it works.

Essentially, the sales tax nexus establishes a tax link between your business and the state. You can’t receive sales taxes from a tax entity without the nexus connection.

Supplier Agreements and Contracts

A dropshipping arrangement requires an outsourcing agreement between the product manufacturer and supplier. Since any contract signed is legally binding, you must know exactly what you’re getting yourself into, or you could find yourself in breach of contract later.

To save you that headache, let’s review the parts of a supplier contract and what they mean.

Scope

The contract scope defines which services the dropshipping arrangement will cover for both parties. For example, the manufacturer will provide stock. The dropshipping partner will keep that stock in their warehouse, pick it up, pack it up, and ship it to customers.

This part of the agreement will detail which products are involved in the arrangement, such as clothing, shoes, bags, or accessories. Delivery details must also be provided, including how the items will be delivered, how long delivery should take, and where the products will be delivered to.

Terms and conditions

The terms and conditions section of the contract establishes a legally binding relationship between the supplier and customers.

They should include what kinds of services you provide, your turnaround times for shipping orders, and how issues are solved.

Payment rate

This part of the contract details what the manufacturer will pay the supplier for their dropshipping services. They may charge wholesale or customer prices.

Payment terms

Accompanying that section are the payment terms.

This area defines how the payments will be distributed, such as a pre-established payment schedule on specific days of the month (the 1st, the 15th, etc.). The payment method should also be included, whether it’s by direct deposit, check, or online payments like PayPal.

Intellectual property

Creating products means having intellectual property rights.

I won’t go too in-depth here because I’m going to talk about it later on, but for now, know that you must establish who has intellectual property rights to the product being manufactured and distributed.

Duration

How long will the contract last? Is it until one or both parties want to end it, or does it have a certain duration, such as a year or two?

A contract is only legally binding for the duration specified.

Liability clauses

Many contracts have liability clauses to protect companies.

Since both sides want safeguards from damages, the legal liability clause section could go back and forth between the lawyers for the two parties until reaching a satisfactory agreement.

Consequences

This section details what happens if one or both parties violate the terms of the agreement.

Usually, you will have to go to court and appear before a judge. A guilty verdict requires you to cover legal fees for the other party and pay them damages.

Force majeure

Although most businesses can plan steadfastly for the future, force majeure is still a useful clause to have in a contract. It protects against unforeseen circumstances that prevent the contract terms from being carried out.

For example, if a labor strike occurs or the warehouse floods, that can impact the terms of the agreement. Due to the force majeure clause, the party suffering the unforeseen event does not have to pay damages as they would in a standard contract breach.

Ensure contracts are enforceable and protect your business interests

Never sign a legally binding contract without a lawyer reviewing the terms first. Contracts are riddled with legalese, and if you don’t understand the terms fully but sign anyway, you could put your business in trouble in the future.

A lawyer will keep your business interests at heart as they review and disseminate the content, then recommend changes to meet your needs.

Consumer Protection Laws

Just as the manufacturer and supplier have rights in a dropshipping arrangement, so do customers. Here is more information on those rights.

The right to buy safe products: Consumer protection laws require that products are not dangerous and that if they are, they are given ample warning (think firearms and other weapons). This is for the protection of the consumer and those around them.
The right to return: A consumer can return a product if they meet the timeframe (usually within 30 days) and the product is eligible for returns. That means the product must typically be in excellent shape, in its original packaging, and with the tags still attached.
The right to be protected from fraud: Consumers should be safeguarded from fraudulent companies seeking to prey on them and swindle them out of large sums of money.

Consumer laws give today’s customers the confidence that purchasing your product or service doesn’t come with any risks or threats. That improves your bottom line and retains customer loyalty and trust.

If your retail business is caught violating the terms of a consumer law, you will receive penalization.

You might have to stop with certain trade practices deemed unfair or fraudulent. You may also be fined and have to repay the customer for their purchase.

How to comply with consumer rights laws in different jurisdictions

United States

In the US, some examples of federal consumer protection laws and statutes are the Fair Credit Reporting Act or FCRA, the Truth in Lending Act or TILA, the Gramm-Leach-Bliley Act or GLB, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the Federal Trade Commission or FTC Act.

The FTC oversees online business operations to ensure fraudulent behavior doesn’t occur. If it does, the above punishments are quickly doled out.

India

India’s Consumer Protection Act, 2019, is an updated version of the Consumer Protection Act, 1986 through the Parliament of India. Under the law, all eCommerce companies must now divulge their original country.

Further, the act presents four consumer rights. Consumers can “seek redressal against unfair and restrictive trade practices,” “be assured of access to a variety of goods or services at competitive prices,” “be informed of the quality, quantity, purity, standard, and price of goods and services,” and “be protected against marketing of goods and services which are hazardous to life and property.”

Europe

European consumer laws allow customers “information, education and to organize themselves to safeguard their interests” and protection over their “health, safety and economic interests.” The European Convention of Human Rights and European Union Law enact these laws.

Intellectual Property Rights

Image courtesy of Vecteezy

I promised I would, so let’s chat more about intellectual property rights.

If you create or design products, you have intellectual property rights. Under these rights, you can decide who uses what you’ve created, how, and for how long.

In dropshipping companies, you must be cognizant of intellectual property rights, ensuring the authenticity of all products you ship to customers. Unfortunately, scams are rampant in this growing industry, so here are some signs you have counterfeit products:

The price differs greatly from the manufacturer’s, either higher or lower.
The products aren’t made of the same materials as the manufacturer’s original description.
The dimensions vary from the manufacturer’s original description.
There are subtle but noticeable design differences.
The same product is not available from the manufacturer.

Selling counterfeit products, even unknowingly, can result in fines of millions of dollars and potential time behind bars, although the latter punishment is often for those who willingly spit in the face of consumer protection rights.

So, how does your dropshipping business mitigate these risks? Learning to identify counterfeits will take you far. You should also consider a training session for all staff, so they know how to dodge counterfeit products before they reach customers’ doorsteps.

Privacy and Data Protection

As more of our online purchases and communications become digitized, data and privacy protections have grown paramount. It’s no surprise that since the General Data Protection Regulation in 2018 many more laws and regulations have appeared.

In Europe, there are:

The EU Artificial Intelligence Act was passed in 2023 and is set to begin between 2025 and 2026. It affects EU businesses using “high-risk” AI.
The Digital Markets Act, or DMA, began in 2024. Under this law, major gatekeeper brands like Google or Apple cannot maintain a stranglehold on the competition through “unfair conditions.”
The Digital Services Act, or DSA, enforced since 2022, requires gatekeepers to remove “illegal and harmful content” under the premise that “what is illegal offline must be illegal online.”
The General Data Protection Regulation, or GDPR, safeguards data for any companies operating from or with brands in the EU member countries.

In the US, many states have begun implementing their own data protection laws, like:

New York Stop Hacks and Improve Electronic Data Security or SHIELD Act
The Kentucky Consumer Data Protection Act or KCDPA
The New Jersey Data Privacy Act or NJDPA
The New Hampshire Privacy Act or NHPA
The Delaware Personal Data Privacy Act or DPDPA
The Indiana Consumer Data Protection Act or INCDPA
The Iowa Consumer Data Protection Act or ICDPA
The Texas Data Privacy and Security Act or TDPSA
The Oregon Consumer Privacy Act or OCPA
The Tennessee Information Protection Act or TIPA
The Montana Consumer Data Privacy Act or MTCDPA
Connecticut’s Data Privacy Law
Utah Consumer Privacy Act
Colorado Privacy Act or CPA
California Privacy Rights Act or CPRA

Since dropshipping websites use a third party, it’s all the more important that you add a privacy policy to your website. Customers should feel secure about how you’ll use their data, where it will end up, and who will see it.

You should also stay compliant with the applicable laws in your state or region. As I mentioned, new data privacy acts go into effect constantly, so every six months or so, brush up on your knowledge to ensure you’re still in the clear.

Advertising and Marketing Compliance

Marketing compliance for dropshipping companies — *Image courtesy of PerformLine*

You’re expected to market and advertise your dropshipping business, but there are yet more laws to familiarize yourself with as you promote your products.

In the US, the FTC oversees these standards, while in the UK, it’s the Advertising Standards Authority or ASA.

Here is a rundown of laws to know:

Some parts of the world, such as the US, have rules against telemarketing. For instance, the Telemarketing Sales Rule from the FTC allows people to add their phone numbers to a National Do Not Call Registry, where they shouldn’t receive telemarketing calls. Robocalls and fraudulent calls are also illegal.
The INFORM Consumers Act mandates that if you work with a third-party seller at a high-volume rate, you must verify their identity. This way, if your audience has to report the third party, they can do so quickly and efficiently.
The FTC has a Made in USA Labeling Rule that requires you to disclose whether you produce your content in the country.
If you make a health claim in your advertising, you must have valid proof to support your assertion.
If you claim to have green products or packaging, you must have evidence to back it up under the Green Guides by the FTC.
If your products are endorsed by an influencer or content creator, you’re both legally liable to reveal your connection.
Children’s advertising laws are designed to safeguard them from inappropriate content in marketing and advertising campaigns. The US’s Children’s Online Privacy Protection Act is particularly picky about food advertisements and marketing as the obesity epidemic in America grows.
The Controlling the Assault of Non-Solicited Pornography And Marketing Act of 2003, better known as the CAN-SPAM Act, is a US-based email law enforced by the FTC that requires the following compliance:
- You must include an option to unsubscribe under your email message.
- All emails must be at least one sentence long.
- You cannot use a false header in an email.
- You can’t email your audience without an unsubscribe option.
- You must label adult content accordingly.
- In the email, you must include your physical address, including a PO Box as applicable.
- The subject and lines must be relevant.
- If a consumer asks to opt out, you must do so in up to 10 business days.

Dropshipping Legalities for Minors

Do you want to know another reason why dropshipping has taken off so astronomically? You can start young. You don’t need to be 18 to open your own dropshipping business, but you won’t be able to run and manage the entire business model yourself.

In the US, many payment processors require a legal adult or guardian to make an account and oversee its use. That’s even the case on Shopify, one of the biggest eCommerce dropshipping platforms on the market, if not the biggest.

In other countries, you can get your dropshipping aspirations underway from an even earlier age, but that still doesn’t mean smoothly overcoming hurdles.

Besides your ability to sign up for dropshipping platforms and use an account, other problems you might run into are:

You might not be legally allowed to operate your business if you’re 18 or younger. Instead, you will require a guardian or parent to co-decide with you and ultimately execute your ideas. They may have to become a supervisor or co-owner.
You probably can’t legally sign contracts with a third party unless your parent or legal guardian does so on your behalf.
You will struggle to get a loan at a young age.

If you decide to proceed with your dropshipping plans, you must surround yourself with people who understand the legalities of minors operating as a business. I especially suggest hiring a lawyer specializing in that area.

Conclusion

Phew!

There are many legal considerations when starting and operating a dropshipping business, but it’s not like you can afford to gloss over any of them.

Get acquainted, ensure compliance, and always be proactive in legal matters!

EngageBay is an all-in-one marketing, sales, and customer support software for small businesses, startups, and solopreneurs. You get email marketing, marketing automation, landing page and email templates, segmentation and personalization, sales pipelines, live chat, and more.

Frequently Asked Questions (FAQ)

1. Is a business license required for dropshipping?

License requirements vary by jurisdiction and state. You will likely need a reseller certificate and a sales tax ID at the very least.

2. How do I handle sales tax for international customers?

Your state laws will dictate whether you should charge international sales tax. If you’re required to, the VAT rate in the EU is 15% or more, while US sales taxes are 10% at most.

3. What should I look for in a supplier contract?

The supplier contract should cover the bases of both parties and ensure fairness for all. Most parties who create contracts primarily look out for their best interests, so it will take legal negotiations to ensure your needs are met.

4. How can I ensure my dropshipping business complies with consumer protection laws?

Upgrade your contracts to include consumer protection law provisions and stay abreast of changing laws so you’re ready to act and change your policies.

5. What are the risks of non-compliance with intellectual property laws?

Well, primarily, you could get sued. You could also face hefty fines and jail time of up to five years.

6. Can minors legally run a dropshipping business?

Yes, although it’s easier to wait until turning 21. Then, there’s no need for a parent to co-sign or co-own the dropshipping agreement contract or business.

1 thought on “Is Dropshipping Legal? Laws and Regulations for Solopreneurs”

Lawyer Sonia
September 25, 2024 at 7:51 AM

Great read on the legality of dropshipping! This article clarifies important aspects for aspiring entrepreneurs and helps ensure compliance in their business.