Is dropshipping legal? 13 risks you need to be aware of

Your side hustle is now a thriving online business but are you compliant with tax rules and selling regulations so that you avoid potential legal disputes?

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Dropshipping is an ecommerce business model that has grown in popularity in recent years. It is legal in the UK and in most countries that British ecommerce businesses serve, including the EU, the US and Canada. It is treated the same as any other ecommerce business.

However, there are legal risks associated with some actions a UK dropshipping business is involved in. For instance, practitioners must follow relevant sales and consumer protection laws and GDPR. 

This article will explain what dropshipping is, how it works and analyse the legal risks associated with it. It is vital to understand these risks to comply with regulations and avoid potential legal disputes.

What is dropshipping?

Dropshipping involves selling goods to a consumer via a third party without holding the stock. One company covers the sales, marketing and customer service and an outsourced supplier handles the manufacturing, customer fulfilment and delivery processes. It has low costs for entry, so it is easy for startups to enter. 

There are various steps an ecommerce retailer needs to take to set up a dropshipping business

Step 1: set up a website to act as the online storefront for customers to order goods.

Step 2: carefully research markets to find products that offer healthy margins between the cost of buying the goods wholesale and the retail selling price, taking into account other costs including shipping and marketing

Step 3: for each product line, dropshipping companies should find a reliable, compliant and efficient third-party supplier to source the product from. The choice of supplier is absolutely vital. 

When choosing a dropshipping supplier, startups should consider what the supplier’s customer service is like, how reliable its order fulfilment service is, order processing efficiency and availability of countrywide and international delivery and shipping services.

How is it different from other ecommerce models?

Dropshipping businesses do not hold stock. Instead, a customer orders via the dropshipping businesses online storefront, paying the retail price for the product. The dropshipping business sends the external supplier the customer's details, paying the wholesale price for the product. The supplier then sends the product directly to the customer.

The gross profit is the difference between the selling price and what the third-party supplier charges for the product. Net profit for the transaction is reached after deducting further costs like delivery charges, website hosting, staff wages and marketing costs.

What are the legal risks of dropshipping?

There are many legal issues that dropshipping businesses need to be aware of that may apply depending on the product sold, where the buyer and seller operate from and what platforms, if any, they advertise their products on. 

We’ll look at each in turn.

1. Do you need a business licence?

This depends on where you operate and at what scale but, in the UK, dropshipping is treated like any other business, so you must register your business in most cases. Even if your dropshipping business is a sideline to your main job, if you earn over £1,000 in a financial year from the business, you must register with HMRC as a sole trader. 

It is also beneficial to have a business licence because it offers reassurance and security to customers and promotes your business as a reliable option. You will also be less liable personally for any disputes.

2. Do follow local, national and international laws

If you sell outside of the UK, be aware of applicable local laws that prohibit the sale of certain items, for instance rules on selling dangerous goods. Consider taking out product liability insurance.

3. Rules for using dropshipping on platforms like eBay, Amazon, Shopify

Each platform has its own specific rules for selling through its marketplace, so be aware of these to stay compliant on each platform or your account could be suspended. This would mean you lose the benefit of being seen by a large targeted audience, ready to buy.

For instance, if you can’t access stock for dropshipping, then suspend your listing or Amazon will ban you. They also have rules whereby you can only resell products from wholesalers, not other retailers.

EBay has similar rules and avoids selling products bought on Amazon on EBay or vice versa or your listings could be cancelled or your account suspended. 

4. Clarify legal risks with your suppliers

There are many potential violations you could fall foul of. If the third-party supplier is selling counterfeit goods, illegal goods or goods that are not what they claim to be, your business as the registered seller could be liable.

“Respect for consumer protection laws is very important,” said Jake Munday, cofounder and CEO of Custom Neon, a global retailer and manufacturer. “Making sure that product descriptions are accurate and that the goods' quality matches the claims made about it are part of this. Legal problems and reputational harm to the retailer could result from deception.”

Create a contract between the seller and supplier that states the third-party supplier is the one to fulfil the customer’s order. Then, each time a customer places an order with the seller, a copy order is made with the supplier to fulfil the order and deliver it directly to the customer.

5. Copyright laws, intellectual property rights and trademarks

Your dropshipping business could be sued for selling goods that infringe copyright laws. Examples are counterfeit promotional items, for instance, dolls purporting to be official Barbie products. 

Be vigilant and conduct due diligence on your suppliers before using them. Test them by buying an item yourself to ensure they comply with copyright laws and the use of trademarks.

Dropshipping businesses cannot legally sell copyrighted products without having the appropriate legal rights. Copyright law applies to dropshipping and copyright authors can take legal action if their intellectual property is used without permission. “Retailers need to do a lot of due diligence on suppliers to make sure they follow tight product standards and intellectual property rules,” Munday said.

6. Consumer protection laws

Even though your business does not manufacture the goods, as the supplier of goods to customers, you must follow consumer protection laws because you are responsible for the quality, safety and legality of goods delivered to your customers. You will also need to create a returns or refunds policy in line with guidelines safeguarding consumers.

7. Truth in advertising laws

When selling a product, you must describe it as it is and not embellish descriptions or photos to entice customers with false advertising.

As the seller, you are responsible for representing the product truthfully and accurately. A dropshipping ecommerce site is as responsible for this as any other retail store and if goods are misrepresented you could face legal issues.

8. Tax laws

If you operate in the UK, you can earn up to £1,000 in a tax year from selling sites before you have to declare the income. This law was introduced to distinguish between ordinary people selling old, unwanted items as they would at a car boot sale, from professional businesses that sell goods or operate a dropshipping service as their main, or a significant secondary, income stream.

Unless your dropshipping business has revenue below the threshold and depending on your other income sources, you may have to pay income tax or corporation tax and possibly VAT if revenue is above the current threshold of £85,000.

9. GDPR

General Data Protection Regulation (GDPR) rules govern data protection and privacy rules relating to how all businesses manage and use data received from customer interactions. 

Although not a specific risk for dropshipping businesses, because these businesses deal with consumer data, it is still an area that businesses must comply with. The UK’s current GDPR laws are governed by the Data Protection Act 2018, but a new bill, the Data Protection and Digital Information Bill is currently progressing through Parliament and will become law in due course.

10. Liability

The level of liability you incur depends on whether you have business liability insurance or not. If you do, you won’t be personally liable, meaning less risk and lower potential costs if legal issues arise from your dropshipping business.

Different types of liability can apply if you sell overseas or for goods you sell that were made in other countries.

11. Product safety laws for different countries

Just because your business is based in the UK, doesn’t mean that only UK laws apply. Be aware of the risks from selling goods manufactured in other countries with less or different product safety laws. 

It’s common (especially at Christmas) to hear horror stories of badly wired electrical goods or children’s toys that injure kids, so monitor what you sell and guard against faulty goods. If you sell goods shipped to other countries check those countries don’t have different rules for goods than what applies in the UK or you could be liable.

12. Refunds

It is sensible to have a refund policy because this is the most straightforward way to mitigate mistakes and satisfy customers if there is an error.

If consumers know you have a refund policy it will encourage them to use your business as it creates trust between the two parties.

13. T&C’s and privacy policy

Although not a legal requirement, providing your customers with access to the terms and conditions of doing business with your dropshipping company mitigates risk by pre-empting potential legal issues that could arise from business operations. 

They provide useful guidance and assurance for your customers, that they are doing business with a reputable company. A T&C’s agreement should include specific clauses to protect your business and prevent disputes arising with customers.

You do need a privacy policy if you collect and use customer data. It protects their data from misuse and works alongside a GDPR policy. 

Conclusion

Although dropshipping is legal in the UK and treated as any other ecommerce business, it does involve many actions that carry legal risks.

You need to consider factors relating to shipping to customers in other countries, adhering to copyright, intellectual property and trademark laws, tax rules, rules on GDPR, data use, product safety and consumer protection laws.

To reduce these risks, create supplier agreements, T&C’s and privacy policies for your customers. Keep updated on understanding and meeting new legal requirements for ecommerce and new regulatory changes and get legal advice if you are unsure of any issues.

Benjamin Salisbury - business journalist

Benjamin Salisbury is an experienced writer, editor and journalist who has worked for national newspapers, leading consumer websites like This Is Money and MoneySavingExpert.com, business analysts including Environment Analyst, AIM Group and written articles for professional bodies and financial companies. He covers news, personal finance, business, startups and property.

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