What Is Considered Merchandise: UCC, IRS, and Customs Rules

Merchandise is tangible, movable property held for sale or otherwise moving through commerce, but what is considered merchandise depends on which body of law is asking. The Uniform Commercial Code, the IRS, federal customs statutes, UCC Article 9, and the FTC each use the word with a slightly different reach. The common thread is physical property intended to change hands; the differences matter when you’re drafting a contract, valuing inventory, clearing an import, pledging collateral, or shipping to a consumer.

The UCC Definition of Goods

The UCC treats “goods” as the functional equivalent of merchandise. Under UCC § 2-105, goods means all movable things, including items custom-made for the buyer, at the time they are identified to a contract for sale.¹ A pallet of electronics, a truckload of lumber, and a machine built to a buyer’s specifications all qualify.

Three categories are carved out: the money used to pay for the transaction, investment securities, and “things in action” such as legal claims or intellectual property rights.¹ Real estate and permanently attached structures also fall outside the definition because they are not movable. Growing crops and unborn animals do qualify, because they will eventually be severed and transferred.

Mixed contracts complicate the picture. When a deal bundles goods with services, as in construction, software implementation, or equipment installation, courts apply a predominant purpose test. If the main point of the deal is delivering a physical product, UCC rules govern the whole contract. If the real purpose is performing a service with goods playing a supporting role, the UCC does not apply. A contract to install a custom HVAC system could go either way depending on how a court weighs equipment cost against labor.

Identification matters too. When a seller sets aside specific items to fulfill a contract by boxing particular units or tagging inventory, those items become identified to the sale. That moment triggers the buyer’s rights to those specific goods and shapes how courts calculate damages if the deal falls apart.

Are Digital Products Merchandise?

UCC Article 2 was built around physical objects, and that boundary still holds. Software downloaded from the internet, streaming media, and cryptocurrency do not qualify as goods under Section 2-105 because they are not tangible, movable things.

The 2022 amendments to the UCC address part of the gap by creating a new category, the controllable electronic record. It covers digital records stored electronically that someone can control, including assets with inherent value like Bitcoin and other cryptocurrencies, as well as records linked to accounts or payment rights. Before the amendments, digital assets were classified as general intangibles under Article 9, which severely limited how lenders could secure an interest in them. The revised framework lets secured parties perfect an interest through control of the digital record rather than relying solely on filing paperwork.

State adoption of the 2022 amendments is still ongoing. Until your state enacts them, digital assets sit outside the traditional UCC merchandise framework in most practical respects. If you deal in purely digital goods, do not assume UCC Article 2 warranties or remedies automatically apply.

Merchandise as Business Inventory

For accounting and tax purposes, merchandise takes a narrower form: goods a business holds specifically for resale. The same laptop that counts as merchandise on a retailer’s shelf becomes a fixed asset if bought for an employee’s desk. Intent determines the classification, not the physical nature of the item.

The label extends across the production lifecycle. Raw materials like bulk steel or plastic resins count as merchandise when a manufacturer buys them for commercial use. Partially completed items, or work in process, retain that status when destined for a buyer further down the supply chain. A finished automobile and the electronic chips inside it are both merchandise at different stages of the same process.

How the IRS Values Merchandise Inventory

The IRS requires businesses that produce, purchase, or sell merchandise to maintain inventories that meet two tests: the method must conform to best accounting practice in the trade, and it must clearly reflect income.² The most common approved valuation bases are cost and the lower of cost or market value.³

For tracking which units were sold, businesses choose between First-In, First-Out (FIFO) and Last-In, First-Out (LIFO).³ FIFO assumes older stock leaves first; LIFO assumes recent purchases sell before older ones. The choice affects taxable income, especially when prices are rising, because LIFO matches higher recent costs against revenue and reduces reported profit.

Damaged, outdated, or otherwise unsalable goods get special treatment. Rather than carrying them at original cost, they should be valued at a realistic selling price minus the direct cost of disposing of them. The IRS cares more about consistency than which particular method a business picks, and switching methods year to year to minimize taxes is exactly what the rules prevent.²

Merchandise Under Customs Law

Federal customs law casts the widest net. Under 19 U.S.C. § 1401(c), merchandise means physical items of every description, and the definition explicitly includes goods whose importation is prohibited as well as monetary instruments.⁴ Contraband is still merchandise for customs purposes; it is merchandise that triggers seizure instead of a duty payment.

Every item entering the country must be classified under the Harmonized Tariff Schedule, an international coding system of up to 10 digits.⁵ Importers must file a commercial invoice with an adequate description of the merchandise, quantities, values, and the appropriate eight-digit HTS subheading.⁶ If you are uncertain about the correct subheading, Customs will assist on request.

Penalties for Misclassifying Merchandise

Under 19 U.S.C. § 1592, penalties scale with culpability:⁷

Negligence: up to two times the unpaid duties, taxes, and fees, or 20% of the dutiable value if the error did not affect the duty amount
Gross negligence: up to four times the unpaid duties, or 40% of the dutiable value
Fraud: up to the full domestic value of the merchandise

The jump between tiers is steep. A negligent mistake on a $100,000 shipment might cost $20,000; a fraudulent one could cost the entire $100,000. Customs and Border Protection makes the culpability determination, so thorough documentation of the classification process is the best defense if a shipment is flagged.

Prohibited Imports

Certain merchandise is banned from entry outright. Federal regulations prohibit importing materials advocating violent insurrection, articles that infringe trademarks or copyrights, and goods from countries subject to economic sanctions administered by the Treasury Department’s Office of Foreign Assets Control. Firearms and munitions require separate import permits under ATF regulations.⁸

Merchandise as Loan Collateral

Businesses routinely borrow using merchandise inventory as collateral, and UCC Article 9 governs these secured transactions. The statute defines inventory broadly for this purpose: goods held for sale or lease, goods furnished under a service contract, and raw materials, work in process, or materials consumed in a business all qualify.⁹

A lender secures its interest by filing a UCC-1 financing statement with the appropriate state office, which puts other creditors on notice that the inventory is pledged. Filing fees vary by state and typically fall between $10 and $100 depending on the filing method and document length. Priority between competing secured creditors generally goes to whoever filed first. Because inventory turns over constantly, Article 9 allows the security interest to attach automatically to newly acquired inventory that replaces sold stock, so the lender does not need to file a new statement every time the shelves are restocked.

FTC Rules for Remote Merchandise Sales

Anyone selling merchandise through mail, internet, or telephone orders is subject to the FTC’s Merchandise Rule under 16 CFR Part 435. You must have a reasonable basis to believe you can ship ordered merchandise within the timeframe you advertised, or within 30 days if you did not state a specific timeframe. When the buyer applied for credit to pay, that default window extends to 50 days.¹⁰

If you cannot meet the deadline, you must contact the buyer and offer a choice: accept the delay or cancel for a prompt refund.¹⁰ Waiting for the customer to complain is not an option; the rule requires the notice no later than the original shipping deadline. It applies to anyone soliciting remote orders, not just large retailers.

Safety Certification and Warranty Requirements

Once merchandise reaches consumers, additional federal rules attach. Manufacturers and importers of non-children’s consumer products that fall under any Consumer Product Safety Commission rule must issue a General Certificate of Conformity. The certificate must be in English, based on testing or a reasonable testing program, and must identify each specific CPSC safety rule the product complies with. Unlike children’s products, general-use merchandise does not require third-party lab testing; the manufacturer can rely on its own testing program to support the certificate.¹¹

When a seller provides a written warranty on consumer merchandise costing more than $15, the Magnuson-Moss Warranty Act requires specific disclosures in a single, plain-language document.¹² That $15 threshold has never been adjusted for inflation since the law’s enactment, so it captures essentially every consumer product sold today.

Required disclosures include a clear description of what is covered, what the warrantor will do if the product fails, the warranty’s duration, and step-by-step instructions for making a claim, along with a name, address, or phone number the consumer can use without charge. Any limitations on implied warranties or exclusions of incidental and consequential damages must appear on the face of the warranty, together with a notice that some states do not allow such limitations.¹²

1
Cornell Law School – Legal Information Institute (LII). UCC 2-105 Definitions: Transferability; Goods; Future Goods; Lot
2
eCFR. 26 CFR 1.471-2 – Valuation of Inventories
3
IRS. Publication 538 – Accounting Periods and Methods
4
Office of the Law Revision Counsel. 19 USC 1401 – Miscellaneous
5
United States International Trade Commission. About Harmonized Tariff Schedule (HTS)
6
eCFR. 19 CFR 142.6 – Invoice Requirements
7
Office of the Law Revision Counsel. 19 USC 1592 – Penalties for Fraud, Gross Negligence, and Negligence
8
eCFR. 19 CFR Part 145 Subpart E – Restricted and Prohibited Merchandise
9
Cornell Law School – Legal Information Institute (LII). UCC 9-102 – Definitions and Index of Definitions
10
eCFR. 16 CFR Part 435 – Mail, Internet, or Telephone Order Merchandise
11
Consumer Product Safety Commission. General Certificate of Conformity
12
eCFR. 16 CFR Part 701 – Disclosure of Written Consumer Product Warranty Terms and Conditions