So how can dropshipping be legal? To answer this question let’s look at the term arbitrage which is a buy and sell model related to the stock markets. In its simplest form arbitrage is the act of buying at a low price and reselling at a higher price. Many Amazon FBA sellers practice this model. They purchase items at a low price then ship the products to Amazon and sell at a higher price. This process is known as retail arbitrage. So how does arbitrage relate to dropshipping? Well, dropshipping is arbitrage in reverse. Dropshipping is a selling model where you sell an item at a higher price then purchase the item at a lower price once it sells, keeping the difference in price as profit.
Are you still confused about dropshipping? I will give you some excellent example of how to dropship later in this article after I explain the question is dropshipping legal.
So to answer your question is dropshipping legal? The answer is yes, dropshipping is legal. However, there are some grey areas of dropshipping for example taxes and copyright infringements. These are two areas where most legal issues arise if there are any. I have a personal story regarding taxes and an IRS audit that I will refer to later in this article.
So the main question is answered, yes dropshipping is legal. There is successful business like Zappos, Wish.com, and Wayfair.com that have their entire business built around the dropshipping model. Have you purchased any furniture lately? 90% of all furniture stores practice a dropshipping model. The mentioned companies above have answered the question is dropshipping legal by proof of there massive success.
Dropshipping is legal; however, just like any business, there are some good practices to follow to ensure your new business is not breaking any laws. One of the most legal concerning areas of dropshipping is taxes.
Dropshipping taxes: When you start drop shipping you need to make sure you are meeting all tax and legal demands. Legal procedures, customs, and taxation are different for each country and even states for that matter. So, you need to follow the rules of the country you are in. Within the United States, taxes, as it relates to dropshipping, can be confusing, so I will do my best to keep this section super simple. This article will focus on taxes within the United States.
Here’s an example of the drop shipping process.
- (You) the Dropshipper gets the customer order; You then place the order with the dropship wholesale supplier or manufacturer who holds the inventory your selling;
- Dropship Wholesale supplier or manufacturer receives your order and ships the item to your customer.
- Dropship customer receives the order and is happy.
So who pays taxes on this item? You the wholesaler supplier or the customer?
The Marketplace Fairness Act, says that states are not required to collect taxes from manufacturers, distributors, wholesalers, or drop shippers that do not reside within the state.
Most states will not collect taxes for purchase made between you and your wholesale supplier. Purchases between you and your dropship wholesale supplier are not considered a taxable transaction in most states. To make sure of this you may want to consider applying for a resale certificate just to avoid any tax errors or tax audits.
So in short, you as a drop shipper should collect taxes from the customer. Below are some example of who should collect dropshipping taxes.
- If you have nexus in the state where the sale occurs, (you) the dropshipper collects sales tax from the customer, even if you have a third-party wholesale supplier ship the item. So to simplify this if the buyer lives in your state and you live in the state. Then you should collect taxes.
Nexus – means a substantial business presence. If you live in the state, you have nexus.
2. If you as the dropshippers and the dropship wholesale supplier do not have nexus in the state in which the purchase was made, then the buyer should pay the taxes for the item purchased.
3. If (you) the dropshippers do not have nexus in the state where the purchase was made, however, the wholesaler and the buyer does. Then the wholesaler may be responsible for collecting taxes.
Florida, California, Hawaii, Connecticut and a couple of other states do require wholesale suppliers to collect taxes on sales if the dropshipper does not have nexus in the state.
Just in case your still confused on dropshipping taxes here is a very detailed video from a good friend of mine Sara.
Earlier I mentioned that I would share with you my IRS tax audit story. So here it is, several years ago in 2016 my dropshipping business was audited by the state of Nebraska. The state assumed I owed them $19,000 in taxes. That’s a serious chunk of change.
I showed up to the tax building with what I thought at the time to be a subpar set of documents to fight off this $19,000 tax claim. The auditors ask me multiple times to show them via the paper documents the sales process. I pulled out purchase receipts and tracking info more times than I would have like too. The auditor tried to prove that the majority of my products where being sold people who lived in the state of Nebraska. The auditors took all my documents and vanished. After a couple of hours, the auditors returned to the room and said you only owe the state of Nebraska $719. And that was for sales throughout the year made to people in the state of Nebraska.
The tax auditor then explained to me the tax process and how I can avoid this in the future by getting various reseller permits and filling out an returning a tax form that exempts me from paying certain sales taxes in the state of Nebraska due to my online sales process.
Haha, I could not believe it, I grabbed my Walmart sac of documents and pimped walked right up out there. After that, I got serious about record keeping. Here what I use to keep all my sales and paperwork in order.
Legal issues of dropshipping vary from country to country and state to state. Information in this article should not take the place of professional legal advice. You should always adhere to the tax laws of your country and or state.
Dropshipping is legal. However, it does not mean every eCommerce platform or payment processor allows the dropshipping business model. Below I will list several eCommerce platforms where dropshipping is allowed and not allowed.
eBay- is dropshipping legal on eBay?
Yes, dropshipping is legal on eBay. Most newbies to dropshipping start of dropshipping on eBay. Many start with a basic Amazon to eBay dropshipping model. There are tools like Hydra-lister.com that allow eBay sellers to list thousands of products in minutes. Are you interested in drop shipping? If so, David Vu created on to the best eBay dropshipping courses online to date. Check it out here.
Amazon – Is dropshipping illegal on Amazon?
Yes, dropshipping is legal on Amazon. Here is a link to Amazon own policy regarding dropshipping. Dropshipping legal on Amazon However, Amazon has set some strict rules to follow for all sellers who decide to drop ship on Amazon.
So here the Amazon dropshipping rules.
1.You need to be an authorized seller of the listed products.
2.You should establish yourself as a seller on slips, receipts, and any other documents.
3.You also need to process returns of the products.
The flowing type of dropshipping is not allowed on Amazon.
For example, purchasing a product from another retailer online and having it shipped to the customer directly. Or if your invoices, packing slips and other documents contains the name or any information about any other seller apart from you. This form of dropshipping is not allowed on Amazon. So basically dropshipping other retailers products on Amazon is not allowed. For example, listing Home Depot or Wal-Mart items on Amazon is not permitted.
Aliexpress – Is dropping illegal on AliExpress?
Yes, Aliexpress is known as one of the world leaders of dropship suppliers. To be very specific, dropshipping on AliExpress can lead you to some serious profits. Companies like dropshiprocket.com and Oberlo offer services that allow you to create amazing stores with Aliexpress products.
Pay- does PayPal accept dropshipping.
Yes, PayPal allows dropshipping. However, keep in mind that if your new to PayPal and you’re using the eBay platform, after your first purchase, Paypal may hold your funds up to 21 days. So keep your new business running smoothly its best to have some reserve chase or credit on hand just in case this happens.
In concluding hopefully, this article has answered the question is dropshipping legal. Remember dropshipping taxes can be tricky, however, if you follow the legal requirements of the state or country you live in you will be fine. Follow the rules and get ready to earn success with your dropshipping business.