Dropshipping is legal in the United States. Selling a product you never physically handle, and having your supplier ship it directly to the customer, breaks no federal or state law on its own. What makes dropshipping risky is everything attached to it: sales tax collection, import duties, product safety certification, intellectual property law, FTC advertising and shipping rules, and your exposure when a product injures someone. The business model is lawful; running one lawfully is the actual job.
Where Dropshippers Actually Get in Trouble
The biggest legal risk in dropshipping is the one most guides skip: product liability. Every commercial seller in the distribution chain can be held responsible when a defective product injures a customer. That includes you, as the seller of record, even though you never saw or touched the item. Product liability generally operates under strict liability, so the injured customer does not have to prove you were careless. They only need to show the product was defective and that the defect caused the injury. When the manufacturer sits overseas and is hard to sue in a U.S. court, the domestic seller becomes the most accessible target.
Federal safety law reinforces this. The Consumer Product Safety Improvement Act requires that children’s products be tested by an accredited lab and come with a Children’s Product Certificate. Non-children’s products subject to a safety rule need a General Certificate of Conformity from the importer.1U.S. Consumer Product Safety Commission. The Consumer Product Safety Improvement Act (CPSIA) When goods ship directly from an overseas factory to a U.S. customer, the CPSC treats the domestic importer of record as responsible for certification. You cannot simply pass along a foreign manufacturer’s certificate; you must issue your own after exercising due care to verify the test results.2U.S. Consumer Product Safety Commission. Online Sellers Safety Guide
If you plan to sell children’s toys, electronics, cosmetics, or anything that touches skin or food, verify your supplier’s compliance paperwork before you list a single product. Product liability insurance is worth the cost for anyone moving meaningful volume.
Counterfeits and Intellectual Property
Counterfeit goods are rampant on overseas wholesale platforms, and if your supplier ships a knockoff, you bear the legal exposure as the seller. Selling products carrying a brand’s trademark without authorization, or selling imitations of a registered mark, triggers both civil and criminal consequences. A trademark owner can seek statutory damages of up to $200,000 per counterfeit mark, or up to $2,000,000 if the infringement was willful.3Office of the Law Revision Counsel. 15 US Code 1117 – Recovery for Violation of Rights Criminal trafficking in counterfeit goods carries fines up to $2,000,000 and up to 10 years in prison for a first offense, with penalties doubling for repeat offenders.4Office of the Law Revision Counsel. 18 USC 2320 – Trafficking in Counterfeit Goods or Services
Copyright is the quieter trap. Product photos and descriptions are copyrighted works. Copying a supplier’s or competitor’s images without written permission is infringement under federal law, regardless of whether you are reselling the product shown.5U.S. Copyright Office. The Digital Millennium Copyright Act The copyright holder can file a takedown notice with your hosting platform, and repeat infringement can get your storefront permanently suspended. Use your own photography, or get explicit written licensing.
FTC Rules on Shipping and Advertising
The FTC’s Mail, Internet, or Telephone Order Merchandise Rule requires a reasonable basis for any shipping timeframe you state when you make the claim. If you do not specify a timeframe, the default is shipment within 30 days of receiving the order.6eCFR. 16 CFR 435.2 – Mail, Internet, or Telephone Order Sales When delays happen, you must notify the customer and offer the choice between consenting to the delay or receiving a full refund. Civil penalties run up to $53,088 per violation.7Federal Trade Commission. Business Guide to the FTC’s Mail, Internet, or Telephone Order Merchandise Rule
This is where dropshipping models get fragile. You do not control your supplier’s warehouse, and overseas shipping can take weeks. Promising “fast shipping” on a product page when your supplier averages 15-day delivery is the kind of claim that draws FTC attention. Build realistic estimates and pad them.
Advertising claims about product quality or performance must be truthful and backed by evidence. If you use influencers, affiliate marketers, or paid reviews, the FTC requires clear disclosure of the material connection, including free products or commissions. The disclosure must be conspicuous enough that a reasonable consumer notices it before being influenced.8Federal Trade Commission. FTC’s Endorsement Guides: What People Are Asking Burying “#ad” in a block of hashtags does not meet that bar.
Your store also needs a clear, accessible return and refund policy published before purchase. State the return window, acceptable product conditions, who pays return shipping, and any restocking fee. Several states will not enforce a restocking fee unless it was disclosed before the transaction, so make fee terms prominent and upfront.
Sales Tax After Wayfair
The 2018 Supreme Court decision in South Dakota v. Wayfair, Inc. ended the old rule that limited sales tax collection to states where you had physical presence. States can now impose collection obligations based on economic activity alone.9Supreme Court of the United States. South Dakota v. Wayfair, Inc.
Most states set an economic nexus threshold, commonly $100,000 in annual sales into that state. South Dakota’s original law also included a 200-transaction trigger, and many states copied it, but that transaction count is being dropped. As of mid-2025, roughly 15 states have eliminated it, with more following. Once you cross the dollar threshold in a state, you owe sales tax there regardless of how many orders got you there.
You need a sales tax permit from each state where you have nexus before collecting tax. Permits are generally free or under $100. Once registered, you can issue a resale certificate to suppliers so you are not paying sales tax on wholesale purchases you will collect tax on at the point of final sale.
Imports, Customs, and the 2025 De Minimis Change
Many dropshipping suppliers are based overseas, particularly in China. When a product ships from another country directly to your U.S. customer, someone is importing it, and import obligations apply.
Under 19 U.S.C. ยง 1321, individual shipments valued at $800 or less traditionally entered duty-free through the de minimis exemption.10Office of the Law Revision Counsel. 19 USC 1321 – Administrative Exemptions That provision let low-value packages clear customs quickly without tariffs.11U.S. Customs and Border Protection. Section 321 Programs The de minimis exemption for shipments from China and Hong Kong was eliminated by executive order effective May 2, 2025. Broader action targeting de minimis for commercial shipments from all countries is underway, with ongoing litigation in the Court of International Trade. If your supply chain runs through China, the duty-free window that made small-parcel dropshipping cheap has largely closed.
Certain categories face outright import bans or require federal permits regardless of value. Firearms, certain food products, animal-derived goods, and items failing U.S. safety standards cannot simply ship to a customer’s doorstep without proper authorization.12U.S. Customs and Border Protection. Prohibited and Restricted Items Selling restricted products without permits exposes you to seizure and federal penalties.
Income Tax and 1099-K Reporting
All net profit from dropshipping is subject to federal income tax. Sole proprietors and single-member LLCs report on Schedule C (Form 1040).13Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship) On top of income tax, you owe self-employment tax at a combined 15.3%, covering both halves of Social Security (12.4%) and Medicare (2.9%).14Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) State income tax applies in most jurisdictions. Estimated quarterly payments are required if you expect to owe $1,000 or more for the year; missing them triggers penalties and interest.
Payment platforms like Shopify Payments, PayPal, and Stripe report your gross sales to the IRS on Form 1099-K if you exceed $20,000 in payments and 200 transactions in a calendar year.15Internal Revenue Service. IRS Issues FAQs on Form 1099-K Threshold Under the One, Big, Beautiful Bill The 1099-K reports gross revenue, not profit. If the number does not match what you report on Schedule C, expect IRS follow-up. Keep detailed records of wholesale costs, shipping fees, software subscriptions, and ad spend, since those are deductible against the gross figure.
Supplier Contracts
A handshake with a supplier leaves you holding the bag when something goes wrong. A written dropshipping agreement should cover fulfillment timelines, product quality standards, intellectual property warranties confirming the supplier has the right to sell the products, and an indemnification clause. The indemnification clause is the piece that matters most: it shifts financial responsibility back to the supplier when a product turns out to be defective, counterfeit, or noncompliant.
Without a signed contract, you have almost no recourse if a supplier ships counterfeit goods, misses windows, or sells products that injure a customer. You remain on the hook to the buyer and to regulators. A contract will not prevent every problem, but it gives you a legal basis to recover losses from the party that caused them. A supplier unwilling to sign a basic agreement is one to avoid.
Business Entity and Licensing
Structure is the first real decision. A sole proprietorship is simplest, but it offers no separation between personal assets and business debts. A limited liability company creates that separation, so a product liability lawsuit or supplier dispute does not reach your personal bank account. For most dropshippers, the LLC strikes the right balance between simplicity and protection.
Every state requires formation documents (typically called articles of organization) filed with the Secretary of State. Filing fees generally run $50 to $500. You will also need a registered agent with a physical address in the state of formation.
Apply for an Employer Identification Number through the IRS once the entity exists. You need it to open a business bank account, file tax returns, and set up supplier accounts. The IRS issues EINs online, free, at the time of application.16Internal Revenue Service. About Form SS-4, Application for Employer Identification Number (EIN) If your store operates under a name different from your legal or LLC name, most localities require a “doing business as” registration at the county or municipal level. Depending on where you operate, a general business license may also be required; check with your city or county clerk.
A Note on Data Privacy
A growing number of states have consumer data privacy laws aimed at online businesses. California’s framework currently applies to businesses with more than $26.2 million in annual gross revenue or that process personal data of 100,000 or more consumers annually. Other states, including Indiana and Kentucky as of January 2026, have similar laws with their own thresholds. Most new dropshipping stores will not immediately cross these thresholds, but if you collect customer emails, track browsing behavior, or share data with marketing platforms, publish an accurate privacy policy covering what you collect, how you use it, and how customers can opt out. Fixing data practices early is cheaper than retrofitting after a state attorney general sends an inquiry.