A consignment deal is a commercial arrangement in which the owner of goods (the consignor) places them with a seller (the consignee) who displays and sells them on the owner’s behalf in exchange for a commission. The owner keeps legal title until a buyer purchases the item. The seller never owns the inventory and functions closer to a sales agent than a buyer. That single fact — title stays with the consignor — drives everything else about how these deals work, who bears the risk, and what steps you need to take to protect yourself.
The Basic Mechanics
The flow is straightforward. The consignor delivers goods to the consignee’s location. Both sides inspect and document the inventory. The consignee displays the items, and when a customer buys one, the consignee deducts the agreed commission and remits the balance to the consignor. Anything that doesn’t sell within the agreed period is returned, or the parties renegotiate.
What separates this from a wholesale purchase is timing and risk. In a normal sale, ownership passes at delivery and the retailer eats the loss on anything that sits. In consignment, the consignor eats that loss. The consignee accepts lower per-unit profit in exchange for carrying no inventory cost. That’s why the model is common in art galleries, antique shops, used furniture stores, and specialty clothing boutiques, where items are expensive, hard to value upfront, or have uncertain demand.
Who Bears the Risk
The consignor carries the financial risk of unsold goods. The consignee carries the risk that comes with possession: items in its custody must be cared for, secured, and accounted for. Because the consignee holds property owned by someone else, the relationship works like a bailment. The consignee owes a duty of reasonable care and can be liable for goods lost, damaged, or handed to the wrong person through negligence. Failing to return unsold goods after the period ends can rise to conversion — treating another person’s property as your own.
Most agreements shift risk of loss to the consignee from the moment of delivery. Damage before delivery, or damage not caused by the consignee’s carelessness, generally stays with the consignor. Insurance is the practical backstop. A workable agreement requires the consignee to carry coverage on the goods and name the consignor as loss payee.1U.S. Securities and Exchange Commission. Consignment Agreement Confirm which value the policy pays on: coverage set at the consigned value (what the consignor expects to receive) leaves a gap when the retail markup is substantial.
Protecting Ownership Under UCC Article 9
Keeping title on paper is not the same as keeping the goods safe from the consignee’s creditors. If the consignee goes under, a bank with a blanket lien on its inventory can sweep up your goods along with everything else on the floor unless you have taken the right protective steps. Those steps live in UCC Article 9.
When Article 9 Applies
UCC Section 9-102(a)(20) defines “consignment” narrowly. The transaction qualifies only if all of the following are true:
- The goods delivered are worth at least $1,000 in aggregate per delivery.
- The consignee is a merchant who deals in goods of that kind under a name other than the consignor’s.
- The consignee is not an auctioneer.
- The consignee is not generally known by its creditors to be substantially engaged in selling other people’s goods.
- The goods were not consumer goods immediately before delivery.
If any condition fails — a delivery worth $800, or goods placed with a well-known consignment shop whose creditors already understand the business model — Article 9 doesn’t apply.2Legal Information Institute. UCC 9-102 – Definitions and Index of Definitions The consignment is still valid, but your protection comes only from the contract, which makes the written agreement more important, not less.
When the transaction does qualify, the UCC treats the consignor’s interest as a purchase-money security interest in inventory.3Legal Information Institute. UCC 9-103 – Purchase-Money Security Interest; Application of Payments; Burden of Establishing That classification gives you a framework for establishing priority over other claimants against the consignee’s assets.
File a UCC-1 Financing Statement
When the deal falls under Article 9, file a UCC-1 with the appropriate state office, usually the Secretary of State. The filing creates a public record that the goods at the consignee’s location aren’t all the consignee’s to pledge. Without it, a consignor who delivered $50,000 in furniture to a shaky retailer can watch that inventory pulled into a bankruptcy estate. The filing does not turn the consignment into a loan; you can use “consignor” and “consignee” on the form instead of “secured party” and “debtor.”4Legal Information Institute. UCC 9-505 – Filing and Compliance with Other Statutes and Treaties for Consignments
Notify the Consignee’s Existing Lenders
Filing alone isn’t always enough. If the consignee already has a lender with a security interest in its inventory, the consignor must also send that lender an authenticated notification stating that the consignor has or expects to acquire a purchase-money security interest in the consignee’s inventory, with a description of the goods. The lender has to receive it before the consignee takes possession.5Legal Information Institute. UCC 9-324 – Priority of Purchase-Money Security Interests Skip this step and the lender’s blanket lien can take priority over your ownership claim. Before delivering goods, run a UCC search on the consignee to see who else already has an interest.
Proceeds After a Sale
Once a consigned item sells, the security interest attaches to the identifiable proceeds.6Legal Information Institute. UCC 9-315 – Secured Party’s Rights on Disposition of Collateral If the consignee collects $2,000 for a consigned painting, you have a protected interest in that $2,000 (less commission) even though the painting is gone. That protection matters most if the consignee becomes insolvent between the sale and payout.
The Sale-or-Return Trap
UCC Article 2 covers a related arrangement called “sale or return,” where goods delivered to a merchant for resale are treated as the merchant’s — and are reachable by the merchant’s creditors — unless the consignor takes protective steps.7Legal Information Institute. UCC 2-326 – Sale on Approval and Sale or Return; Consignment Sales Calling the deal “consignment” or “on memorandum” in the paperwork does not by itself keep the goods out of the consignee’s creditor pile. You have to comply with Article 9’s filing rules, or show that the consignee’s creditors already know the business is substantially engaged in selling other people’s goods. Relying on the label alone leaves the inventory exposed.
What the Written Agreement Should Cover
The contract is where you win or lose most disputes. Vague language is where they start.
Inventory and Pricing
Describe every item with enough detail to identify it later: photographs, serial numbers, SKUs, or other unique identifiers. Set a floor price for each piece — the minimum the consignee can accept without your written approval — by working backward from your cost plus commission so the payout still turns a profit. Address markdowns directly. Without clear rules, a consignee can cut prices to move stock and leave you below cost. State whether the consignee can reduce prices at all, by how much, and after how long.
Commission
Rates vary by industry. Clothing shops commonly keep 40% to 60% of the sale price. Art galleries frequently take 50%. Furniture and specialty goods fall in between, and rates can drop to around 25% for high-value items that move quickly. Say whether commission is calculated on the gross sale price or the net after discounts, returns, and payment processing fees.
Duration and Termination
Set clear start and end dates. Thirty to ninety days is common; high-value art or specialty goods may run longer. Spell out who arranges and pays for return shipping when the period ends, whether the consignor gets a window to collect unsold goods before storage fees begin, whether either side can terminate early with notice, and how a recall of goods works before the period is up.
Title and Authenticity Warranties
The consignee will expect two guarantees: that you own the goods and can pass clear title, and that the goods are what you say they are. Title warranties are strict. Good-faith belief in ownership is not a defense if the item turns out to be stolen, because a buyer cannot receive good title from a thief. Authenticity language should track what you actually know. Warranting that you “have no reason to believe” an item isn’t genuine is much safer than guaranteeing authenticity outright.
Dispute Resolution and Governing Law
A dispute resolution clause saves both sides from expensive litigation. Options include mandatory mediation before suit, binding arbitration, or mediation followed by arbitration if that fails. Identify which state’s law governs the contract, especially when the parties are in different states.
Tax Handling
Sales Tax
In most states, the consignee is treated as the retailer for sales tax purposes. The consignee collects the tax from the end customer and remits it to the state. The consignor does not collect sales tax on the amount the consignee remits, because that payment is a share of proceeds rather than a retail sale. Rules vary, so both parties should confirm their obligations with the relevant tax authority.
Consignors placing inventory with consignees in other states face a bigger issue. Storing goods in a state, even in someone else’s hands, can create physical presence nexus and require the consignor to register for and collect sales tax on direct sales into that state. More than 20 states treat stored inventory as a nexus trigger. Multi-state consignment can create multi-state registration obligations quickly.
Income Tax
Consignment income is taxable to the consignor in the year the goods sell, not when they’re delivered to the consignee. The consignor reports the proceeds, minus commission, as business income. If payment flows through a processor or online marketplace, the processor may issue a Form 1099-K once payments exceed the applicable threshold. The IRS has been adjusting that threshold, and the implementation timeline has shifted more than once, so check current guidance for the reporting year in question.8Internal Revenue Service. Understanding Your Form 1099-K Exchange tax identification numbers before the first payout, and say in the agreement which party issues year-end tax forms.
Payouts and Returns
Payouts usually run on a monthly or twice-monthly cycle. The consignee provides a sales report showing which items sold, the gross price, commission deducted, and any processing fees or adjustments, and then pays the net by check or electronic transfer.
Customer returns cause more settlement disputes than anything else. If a buyer returns a consigned item after the consignor has already been paid, the agreement should say whether the consignor refunds the payout, whether it comes off next month’s settlement, or whether the consignee absorbs the loss. Reconcile the remaining physical inventory against the records each cycle. Signed intake receipts, shipping logs, and copies of every sales report are what protect both sides if the relationship breaks down or either party faces an audit.