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How do I mark the item as Dispatched?

Local status has no affect on the eBay statuses, these are there to assist in your local management in the order process, Online statuses match the eBay statuses and you can set these statuses within Just Ship IT by right clicking on an order (or multiple orders) and then choosing Online Status->Paid & Dispatched, note you need to Download from eBay after you have done this for eBay to be updated.