March 1, 2022

Drop shipping definition

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Since there are no warehouses or product development, you can start the dropshipping business independently. Perhaps this is why people often wonder if dropshipping is illegal in the country. But the truth is entirely different.

Dropshipping is legal in the US, and big-box companies frequently use it. 

Depending on your supplier, you may face various legal hassles, but dropshipping is a fully legal way of order fulfillment on its own.

Make sure you read the Dropshipping Agreement Contract to safeguard yourself.

What is Dropshipping?

Dropshipping is an order fulfillment method wherein you sell products from your online store. The catch is you don't have products in your online store. You inform the supplier who ships the product to the consumer directly.

Related Article: What is Dropshipping

Dropshipping Laws you Should be Aware of

Dropshipping is a great way to make money, and it is a legal business in the US. However, there are a few laws that you need to follow. Else, your business may get banned, or consumers may sue you. Here are a few rules you should follow.

 1. You can't use another company's intellectual property.

2. It is not mandatory to get a business license for dropshipping. Many young merchants don't even apply for a business license. However, it is better to get a license if you want eCommerce websites to take you seriously.

Some other reasons to get a business license are as follows:

i) It becomes easier to pay tax. You may have to pay both the sales tax and income tax. A tax advisor can help you understand how much you have to pay to the IRS.

ii) You are personally responsible for any clients' problems after purchasing a product from your eCommerce store if you do not have a business license. It's best to buy liability insurance to avoid any responsibility.

This will safeguard you from legal repercussions if a product you sell proves to be of poor quality. The insurance will cover all legal fees if you need to defend yourself in a lawsuit.

3. You need to have a proper privacy policy. It is a legal document that specifies how a business collects, uses, and safeguards consumers' personal information. If you collect online store visitors' personal information, you need to maintain a good privacy policy.

Amazon Dropshipping Laws

Dropshipping is perfectly legal on Amazon, but if you don't follow their guidelines, you could be suspended at any time.

When you're out of stock, you should close your listings. If you don't follow this rule and still get sales, Amazon may suspend your account. The same is true if your products are consistently shipped late.

If you wish to work at Amazon, you need to follow a few other dropshipping laws. Here are a few of them.

The most significant regulation is that you cannot dropship products from another online merchant.

You must be the registered vendor for dropshipping products.

Every touchpoint with your clients should clarify that you're the product's seller: on invoices, external packaging, packing slips, and other product-related information.

Before shipping the order, all information related to third-party sources (e.g., invoices, packing slips) must be removed.

Accepting and processing returns is your duty.

You must follow the terms and conditions of your seller agreement. You also have to check out other policies that apply to Amazon merchants selling products.

You can't purchase products from another online retailer and make them ship the products to buyers.

Your account will most likely be banned if you do not follow Amazon's drop shipping regulations.

Tip: Dropshipping Directories like Salehoo help you find legitimate suppliers to help you sell on places like Amazon

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eBay Dropshipping Laws

Just like Amazon, eBay allows drop shipping. However, there are several laws you have to follow to continue your business.

Merchants are still attempting to drop ship merchandise from Amazon to eBay. They buy things from Amazon FBA and resell them on eBay with a profit margin. This "business model" is unethical; therefore, don't do it. Furthermore, it is not allowed at eBay or Amazon, and you will be in hot water as soon as angry buyers find you've received them.

If eBay discovers that you are reselling products from another shop, such as Amazon, you may face the following penalties:

  • Removing your listings
  • All of your listings are hidden or demoted from search results.
  • Giving a lower seller rating
  • Restrictions on buying and selling
  • Removing all sorts of buyer or seller protection.
  • Suspension of account

None of these are beneficial to your dropshipping company!

Here are a few dropshipping laws you have to follow at eBay.

i) You have to make sure buyers receive the products within 30 days. So make sure you find a reliable supplier.

ii) As a drop shipping company, you will be there for customer service.

iii) You need to have a PayPal account as this is the standard payment method.

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How to Avoid Drop Shipping Scams

Now that you know all the laws related to dropshipping, it's time to know about a few signs of a fishy dropshipping supplier. Just like it is important to avoid scams when looking for payday loan solutions, you also need to avoid fraudsters in dropshipping. 

Here are the two warning signs of a drop shipping scam.

Wholesalers usually don't have top-notch websites. But they don't have spammy websites either. If you find any website without proper 'about us' or 'contact us, it's a red flag.

It's best to sign an agreement with the supplier so that both of you are on the same page. You can protect yourself in case of lawsuits or ambiguities. If the supplier refuses to sign an agreement, it's a warning sign.

Drop Shipping Laws Conclusion

Dropshipping allows you to start an online business with minimal investment and no inventory. But there are a few laws you need to follow. For example, you must follow the anti-spam law and register an official trademark.  Furthermore, you need to find trustworthy suppliers because if your customers don’t receive products on time, they may cancel the orders and ask for a refund.

If the products are bad, customers may return them and ask for a refund. You may even get sued in the long run.

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About the author 

Lyle Solomon

Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific's McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a principle attorney.

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