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Why are sellers allowed to say item is located and ships from Canada but is actually located and ships from China?

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They aren't 'allowed' to say that so if you know that is happening, you should report the seller and/or the listing to eBay.  Unfortunately, it may take reports from a few different people before anything is done.  Some sellers do have warehouses in different countries so eBay has no way of knowing if an Asia seller is shipping from North America or Asia unless people complain.

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Be sure to give the seller appropriate feedback for the transaction.

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