Consignment is a sales arrangement in which the owner of goods hands them to a retailer or dealer to sell but keeps legal ownership until a customer actually buys them. The retailer never purchases the inventory. They display it, market it, and complete the sale, then take an agreed cut and pay the rest to the owner. If the goods don’t sell, they go back. That structure is common in art galleries, antique shops, vintage clothing stores, and other specialty retail where items are unique, expensive, or slow to move.
Two roles run through every consignment deal. The consignor owns the goods and supplies them. The consignee takes physical possession, handles the store-front side of the transaction, and collects a commission when something sells. Title stays with the consignor the whole time the item sits on the shelf. When a customer buys, ownership passes directly from the consignor to that customer; the consignee is a middleman for the transaction, not a link in the chain of title.
How a Consignment Sale Actually Runs
The process starts when the consignor delivers merchandise to the consignee’s location. The consignee inspects each item, grades its condition, and logs it into inventory with a unique identifier so both sides can track what sold, what’s still on the floor, and what needs to go back. Photographing items at intake is standard for higher-value goods because it creates a baseline record if anyone later disputes damage.
Once cataloged, the goods go on display. The consignee handles merchandising, marketing, and the customer transaction. When an item sells, the consignee deducts the agreed commission and remits the balance to the consignor, usually monthly or quarterly. If items remain unsold when the contract period ends, the consignee returns them. There’s no purchase obligation and no restocking fee.
Consignment vs. Wholesale
The distinction people miss is who carries inventory risk. In a wholesale purchase, the retailer buys the stock outright and owns it whether it sells or not. In consignment, the retailer owns nothing. Unsold goods go home to the consignor. That difference reshapes almost everything downstream: how the goods are booked, who pays tax on the sale, who insures them, and what happens if the retailer’s business fails.
What Belongs in the Written Agreement
Handshake consignment deals are where most disputes start, because the parties’ interests diverge in predictable ways once money is involved. A written agreement should cover at least the following:
- Pricing authority. Does the consignor set a firm floor price, or can the consignee mark items down within a range? If discounting is allowed, set a minimum below which the consignor must approve any reduction.
- Commission split. The percentage each side keeps from a sale. A 60/40 split favoring the consignor is common, though rates vary widely by industry. High-end art galleries often take 50%. Clothing consignment shops may take 40% to 60%, depending on how much of the pricing and marketing the consignee handles.
- Payment schedule. How often the consignee remits the consignor’s share, and in what form.
- Duration and termination. How long the consignment period lasts, what triggers early termination, and how much notice each side must give.
- Liability for loss or damage. Who bears the risk while the goods sit in the consignee’s store. Most agreements make the consignee responsible for insuring consigned goods against theft, fire, and accidental damage up to their agreed value.
- Unsold inventory. Who pays return shipping when the contract expires, and how quickly the consignee must send items back.
Pricing and commission terms get the most attention during negotiation, but the insurance clause is where consignors most often get burned. A consignee’s standard business policy typically covers property the business owns, not property someone else owns that happens to be on the premises. If the agreement doesn’t specifically require the consignee to carry bailee’s insurance (a policy designed to cover goods in someone else’s custody), a fire or theft could leave the consignor with no recourse. Ask for proof of coverage, not just a promise to obtain it.
The UCC Filing Risk Most Consignors Don’t Know About
Consignment is more legally complex than most people realize, and this is where the real financial danger sits. Under Article 9 of the Uniform Commercial Code, a consignment is treated similarly to a secured transaction, which means the consignor’s ownership isn’t automatically protected against the consignee’s other creditors.
The UCC defines a consignment as a delivery of goods worth at least $1,000 per transaction to a merchant who deals in goods of that kind under a name other than the consignor’s, where the merchant is not an auctioneer and is not generally known by its creditors to be substantially engaged in selling others’ goods. 1Legal Information Institute. Uniform Commercial Code 9-102 – Definitions and Index of Definitions If your arrangement fits that definition, Article 9 applies whether you call it a “consignment” or not.
If the consignor does not file a UCC-1 financing statement and the consignee later goes bankrupt or defaults on other debts, the consignee is treated as if they owned the goods outright. The consignee’s creditors can seize the consigned inventory to satisfy the consignee’s debts, and the consignor loses everything on the consignee’s shelves. 2Legal Information Institute. Uniform Commercial Code 9-319 – Rights and Title of Consignee With Respect to Creditors and Purchasers
To protect yourself, file a UCC-1 in the state where the consignee is located before you deliver the goods. The UCC lets you use the terms “consignor” and “consignee” on the filing instead of “secured party” and “debtor,” so you’re not mischaracterizing the relationship. 3Legal Information Institute. Uniform Commercial Code 9-505 – Filing and Compliance With Other Statutes and Treaties for Consignments, Leases, Other Bailments, and Other Transactions Filing fees vary by state but generally run $10 to $100, a small cost compared to losing your inventory in someone else’s bankruptcy.
One more step matters if the consignee already has a lender with a security interest in the consignee’s inventory. Before delivering your goods, notify that lender in writing that you’re sending consigned inventory. 4Legal Information Institute. Uniform Commercial Code 9-324 – Priority of Purchase-Money Security Interests Without that notice, the existing lender’s claim can take priority over yours. Both the filing and the notification must happen before delivery. UCC filings also need to be renewed every five years, so if the relationship is long-term, calendar the renewal.
How Each Side Books a Consignment Sale
Consignment accounting turns on a single rule: revenue follows ownership, not physical location.
The consignor keeps consigned goods on the balance sheet as inventory even though the items physically sit in someone else’s store. Nothing leaves the consignor’s books until a customer actually buys. At that point, the consignor recognizes the full sale price as gross revenue and records the consignee’s commission as a selling expense. On a $1,000 sale with a 40% commission, the consignor books $1,000 in revenue and $400 in commission expense.
The consignee’s books mirror that from the other side. Consigned goods never show up as inventory on the consignee’s balance sheet, because the consignee only has custody. When the item sells, the consignee records only the $400 commission as revenue, not the full sale price. The consignee is acting as an agent, so the gross transaction never flows through the consignee’s income statement.
Tax Obligations on Both Sides
For income tax purposes, the consignor reports the full sale price as gross income and deducts the commission as a business expense. The consignee reports only the commission.
Starting in 2026, the consignee must issue a Form 1099-NEC or 1099-MISC to the consignor if total payments to that consignor reach $2,000 or more during the calendar year. The threshold rose from $600 for payments made after December 31, 2025. 5Internal Revenue Service. Form 1099 NEC and Independent Contractors The consignor still owes tax on all income whether or not a 1099 is issued; the form is an information return, not a tax threshold.
Sales tax raises a question most new consignors don’t anticipate: who collects and remits it? In most states the consignee, as the party completing the retail sale, collects sales tax from the customer and remits it. Some states let the consignor handle remittance instead if the consignor is registered as a retailer in that jurisdiction.
The bigger surprise is nexus. Storing your inventory in another state, even at a consignee’s location, generally creates physical nexus there, which can trigger an obligation to register, collect, and remit sales tax in that state. Consign goods to retailers in several states and you may pick up sales tax obligations in each. Artisans and small manufacturers who think of themselves as selling from their home state often miss this.
When Consignment Is the Right Fit
Consignment works best when goods are unique, high-value, or hard to price in advance. Art, antiques, vintage clothing, handmade jewelry, and specialty furniture are natural fits because both sides benefit from testing the market without committing capital. The consignor gets retail exposure they couldn’t build alone. The consignee fills a floor with interesting inventory without purchase risk.
It’s a poor fit when goods are commoditized, low-margin, or perishable. If the product is easily available from wholesalers, the consignee has little reason to push your consigned items over stock they’ve already paid for. Owned inventory represents sunk cost that has to move; consigned inventory doesn’t. That structural tension is worth naming, because it explains why consigned goods often get the worst shelf placement in mixed inventory stores. Strong agreements address it with minimum marketing commitments or declining commission rates that reward faster sales.