Consignment means handing your goods to a retailer, gallery, or dealer who agrees to sell them for you, while you keep legal ownership of the items until a customer actually buys them. The retailer never purchases the inventory. They display it, market it, handle the sale, and take an agreed percentage of each transaction. Anything that doesn’t sell comes back to you. It’s a common arrangement in art galleries, antique shops, vintage clothing stores, and specialty retail, where goods are expensive, unique, or slow-moving and neither side wants to tie up cash in inventory that may sit for months.
Who Owns What, and When Title Passes
A consignment deal has two parties. The consignor owns the goods and supplies them for sale. The consignee is the retailer who takes physical possession, displays them, and runs the transaction. Ownership stays with the consignor the entire time the goods sit on the consignee’s shelves. Title only passes when a customer walks in and buys something, and it transfers directly from the consignor to that customer. The consignee is never in the chain of ownership.
That is the core difference between consignment and wholesale. In a wholesale purchase, the retailer buys inventory from the supplier and owns it whether it sells or not. In consignment, the retailer carries zero inventory risk. If the goods don’t sell, they go back. There’s no purchase obligation and no restocking fee.
Once items are cataloged and displayed, the consignee handles merchandising and the customer-facing sale. When something sells, the consignee deducts the agreed commission from the sale price and sends the remainder to the consignor, typically monthly or quarterly. Unsold items are returned at the end of the contract period.
What the Consignment Agreement Needs to Cover
A written agreement is non-negotiable. Handshake deals are where consignment disputes start, because the parties’ interests diverge in predictable ways once money is involved. At a minimum, the contract should spell out:
- Pricing authority. Whether the consignor sets a firm price or the consignee can discount within a range, and the floor below which the consignor must approve any markdown.
- Commission split. The percentage each side keeps. A 60/40 split favoring the consignor is common. High-end art galleries often take 50%. Clothing consignment shops may take 40 to 60% depending on how much pricing and marketing work the consignee is doing.
- Payment schedule. How often the consignee pays out and in what form.
- Duration and termination. How long the consignment runs, what triggers early termination, and the notice each party must give.
- Liability for loss or damage. Who bears the risk while the goods sit in the store. Most agreements make the consignee responsible for insuring consigned goods against theft, fire, and accidental damage up to their agreed value.
- Unsold inventory. What happens when the contract ends, who pays return shipping, and how quickly the consignee must send the goods back.
Pricing and commission 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 sitting on the premises. If the agreement doesn’t specifically require bailee’s insurance (a policy designed to cover goods in someone else’s custody), a fire or theft can leave you with no recourse. Ask for proof of coverage, not just a contractual promise to obtain it.
The UCC Filing Most Consignors Don’t Know About
Here is where consignment gets more legally complex than most people realize, and where the real financial danger lies. Under Article 9 of the Uniform Commercial Code, a consignment is treated similarly to a secured transaction. Even though you own the goods, that 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 meets this definition, Article 9 applies whether you call it a consignment or not.
File a UCC-1 Financing Statement Before Delivery
If you don’t file a UCC-1 and the consignee goes bankrupt or defaults on other debts, the consignee is treated as though they own the goods outright. The consignee’s creditors can seize your inventory to satisfy the consignee’s debts, and you lose everything on their shelves. 2Legal Information Institute. Uniform Commercial Code 9-319 – Rights and Title of Consignee With Respect to Creditors and Purchasers This is the single biggest risk in consignment, and most small consignors have never heard of it.
To protect yourself, file a UCC-1 financing statement in the state where the consignee is located before you deliver the goods. The UCC specifically allows you to 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 fall in the $10 to $100 range. That’s a negligible cost compared to losing your inventory in someone else’s bankruptcy.
Notify Any Existing Lender
Filing a UCC-1 protects your interest, but if the consignee already has a lender with a security interest in their inventory, you need one more step. Before delivering, 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 this notification, the existing lender’s claim can take priority over yours. Both the filing and the notification must happen before the goods are delivered. If the consignee has been in business for any length of time and has inventory financing, this step is essential.
These protections also need to be renewed every five years. If you maintain a long-term consignment relationship, calendar that renewal or risk losing the priority you spent the effort to establish.
Taxes: What You Report and Where You Owe
For income tax purposes, the consignor reports the full sale price as gross income and deducts the commission paid to the consignee as a business expense. The consignee reports only their commission as income.
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 increased from $600 for payments made after December 31, 2025. 5Internal Revenue Service. Form 1099 NEC and Independent Contractors You still owe tax on all your consignment income regardless of whether a 1099 is issued. The form is an information reporting requirement, not a tax threshold.
Sales tax raises a question many new consignors don’t anticipate: who collects and remits it? In most states, the consignee, as the party actually completing the retail transaction, collects sales tax from the customer and remits it to the state. The rules vary, and some states let the consignor handle remittance instead if they’re 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 in that state. That can trigger an obligation to register, collect, and remit sales tax there. If you consign goods to retailers in multiple states, you may have sales tax obligations in each one. This catches a lot of small consignors off guard, especially artisans and manufacturers who think of themselves as selling from their home state but have inventory scattered across the country.
When Consignment Is the Right Fit
Consignment works best when the 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. You get retail exposure you couldn’t afford to build alone. The retailer fills their 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 incentive to prioritize your consigned items over inventory they’ve already paid for. Owned stock represents sunk cost that needs to move, so consigned goods tend to get the worst shelf placement when the consignee also carries purchased inventory in the same category. Strong consignment agreements address this with minimum marketing commitments or declining commission rates that reward faster sales.