Consignment stock is inventory that sits on a retailer’s shelves but legally belongs to the supplier until a customer buys it. The retailer takes possession without paying upfront; the payment obligation to the supplier is triggered only by a sale to an end customer. That structure lets suppliers place products in more locations without waiting for purchase orders, and lets retailers fill shelves without tying up cash on merchandise that may not move. Under the Uniform Commercial Code, arrangements that meet certain thresholds are treated as secured transactions, which means both sides have filing and accounting rules to follow if they want their positions protected.
The Two Parties
Every consignment arrangement has a consignor and a consignee. The consignor is the supplier — usually a manufacturer, wholesaler, or individual owner — who ships goods to another business and expects payment only after those goods sell. The consignee is the retailer or dealer who receives the goods, displays them, and handles the sale to customers. The consignee provides the storefront, staff, and sales effort but takes on none of the inventory risk.
Both sides share an incentive to move product quickly. Unsold stock earns neither party anything, and the consignor still carries the cost of producing or acquiring it.
Where Consignment Shows Up
Consignment tends to appear where products are expensive, slow-moving, or hard to predict. Art galleries are the classic case: a gallery displays an artist’s work, and the artist gets paid only when a piece sells. Clothing resale shops accept secondhand garments and split the proceeds. Antique dealers, used bookstores, and jewelry stores use the same model.
On the commercial side, automotive parts distributors, medical device companies, and industrial equipment suppliers use consignment to keep goods stocked at dealer locations without forcing dealers to finance large inventories. The arrangement works especially well for products with uncertain demand, seasonal swings, or high per-unit cost.
What Legally Counts as a Consignment Under the UCC
Not every informal deal to place goods in someone’s store qualifies as a “consignment” in the legal sense. UCC Section 9-102(a)(20) sets specific criteria. A consignment exists when a person delivers goods to a merchant for the purpose of sale, and all of the following are true:
- The merchant sells goods of that kind under a name other than the consignor’s name.
- The merchant is not an auctioneer.
- The merchant’s creditors do not generally know the merchant is substantially engaged in selling goods belonging to other people.
- The aggregate value of each delivery is $1,000 or more.
- The goods were not consumer goods immediately before delivery.
That last point matters more than it looks. Lending your neighbor a lawnmower to sell at a garage sale doesn’t trigger the UCC’s consignment rules, because the lawnmower was a consumer good. Deliveries worth less than $1,000 also fall outside this framework. Smaller or informal transactions may still be consignments in the everyday sense, but they don’t get the UCC’s secured-transaction protections, so the consignor’s legal position is weaker if something goes wrong.1Cornell Law Institute. UCC 9-102 – Definitions and Index of Definitions
Who Owns the Goods and When Title Moves
Legal title stays with the consignor the entire time the goods sit in the consignee’s store. The consignee has physical possession and authority to sell, but ownership doesn’t shift until a customer actually buys the product. In some agreements, title passes briefly to the consignee at the moment of sale before transferring to the buyer; the practical effect is the same. The consignor bears the economic risk of unsold inventory.
If goods go unsold past the agreed period, the consignor can demand them back. Consignment agreements often set a specific return window after termination, and treat any goods not returned within that window as purchased by the consignee, triggering payment.2SEC. EX-10.1 Consignment Agreement
Protecting the Supplier Against the Retailer’s Creditors
This is where consignment gets dangerous for unprepared suppliers. Under UCC Section 9-319, while consigned goods are in the consignee’s possession, the consignee is treated as if it owns them for purposes of determining creditor rights. In plain terms: if the consignee has debts and creditors move in, or the consignee files for bankruptcy, the consignor’s goods can be pulled into the estate unless the consignor has taken steps to protect its position.3Cornell Law Institute. UCC 9-319 – Rights and Title of Consignee With Respect to Creditors and Purchasers
The protection mechanism is a UCC-1 financing statement, a public filing that puts the world on notice that the consignor has a security interest in the goods. Filing this statement perfects the consignor’s interest and elevates it from unsecured creditor to secured creditor in a bankruptcy proceeding. Without the filing, a bankruptcy trustee has priority over the consignor’s unperfected interest and can treat the consigned goods as part of the estate.
Beating an Existing Inventory Lender
Perfection alone isn’t always enough. If the consignee already has a lender with a blanket security interest in all of its inventory — extremely common in retail — the consignor has to go further. Under UCC Section 9-324, the consignor must establish a purchase-money security interest by perfecting before the consignee receives the goods and sending written notice to any existing secured creditors. That notice has to reach the conflicting creditor before the consignee takes possession.4Cornell Law Institute. UCC 9-324 – Priority of Purchase-Money Security Interests
Skipping this step is where most consignors lose. A supplier who ships $50,000 in inventory to a retailer without filing a UCC-1 or notifying the retailer’s bank can end up as a general unsecured creditor in bankruptcy, behind the bank and behind the trustee. Filing fees vary by state, typically from about $10 to over $100. Trivial compared to losing a shipment.
How the Filing Reads
UCC Section 9-505 allows the consignor to use the terms “consignor” and “consignee” on the financing statement rather than “secured party” and “debtor.” Without it, a consignment filing would look identical to a standard secured loan. The filing is made in the state where the consignee is organized if it’s a business entity, or where the consignee resides if an individual.5Cornell Law Institute. UCC Article 9 – Secured Transactions
Who Bears the Risk of Loss
Because the consignor retains legal title, the consignor generally bears the risk of loss if goods are destroyed, stolen, or damaged while in the consignee’s possession. This follows from basic bailment law: the consignment creates a bailment relationship, and the bailee is typically not liable for losses that occur without negligence on their part. Fire, flood, or theft from a break-in would ordinarily fall on the consignor.
Some consignment agreements confirm this directly. One SEC-filed agreement stated that the consignor “shall bear the entire risk of loss or damage to the Asset at all times” prior to a sale, and that the consignee had no obligation to insure the goods.6SEC. Standard Form Consignment Agreement Other agreements flip this and require the consignee to carry insurance. Consignors who don’t want to leave it to chance either require proof of insurance from the consignee or maintain their own inland marine or commercial property policy covering goods at off-site locations.
Consignee negligence is a separate question. Even without title, the consignee is responsible for basic safekeeping, and a consignee whose carelessness causes damage — leaving electronics in a leaking warehouse, for instance — can be held liable for the value destroyed.
Pricing, Reporting, and Payment
Consignment agreements usually give the consignor significant control over pricing. The consignor sets the retail price, and the consignee either needs approval to offer discounts or can only mark down within a pre-authorized percentage. This protects the consignor’s brand positioning and prevents quick-commission fire sales.
The payment cycle starts when the consignee sells a product and records the transaction. Most agreements require the consignee to submit a detailed sales report on a weekly or monthly basis, listing every item sold and the price it fetched. One publicly filed agreement required weekly reports covering all consigned goods sold during the prior week, with itemized pricing.2SEC. EX-10.1 Consignment Agreement The report triggers the consignor’s invoice; the consignee then pays within the agreed timeframe.
The consignee keeps a portion of each sale as compensation. Commission rates vary widely. Clothing consignment shops often split roughly 40/60 or 50/50, while consignees selling high-value items like fine art or luxury goods may keep a smaller share, typically 10% to 30%. The split depends on product category, sales volume, and negotiating leverage. Payment terms typically give the consignee 15 to 60 days after the reporting period to remit what’s owed; the SEC-filed agreement referenced above allowed 60 days from the invoice date.2SEC. EX-10.1 Consignment Agreement
How Each Side Books It
Consignment accounting turns on one principle: no revenue until the end customer buys. Under ASC 606, an arrangement is treated as consignment rather than a sale when the supplier still controls the product until a triggering event, can require the product’s return or transfer, and the consignee is not required to pay regardless of whether the product sells.
The consignor keeps consigned goods on its own balance sheet as inventory at cost, even though the products are physically sitting in someone else’s store. No revenue and no cost of goods sold get recorded until the consignee reports a completed sale. At that point the consignor recognizes revenue at the agreed price, records cost of goods sold, and removes the items from inventory. Shipping or other consignment-related costs, like freight to the consignee’s location, are usually held in a separate account until sale.
The consignee does not record consigned goods as an asset because it doesn’t own them. The goods don’t show up on the consignee’s balance sheet at all until a customer buys. When that happens, the consignee records the cash or receivable from the customer, a liability for the amount owed to the consignor, and commission revenue for the difference. Anyone reading the financial statements then sees an honest picture of what the consignee actually owns.
Sales Tax
In most states, the consignee is responsible for collecting and remitting sales tax on consignment transactions. The consignee has possession, conducts the retail sale, and transfers the product to the buyer. The consignor generally does not need a seller’s permit solely because it places goods on consignment, though this varies by state. Consignees need to make sure their sales tax registration covers these transactions and that they’re collecting tax based on the full retail price paid by the customer, not just the commission earned.
Contract Provisions That Prevent Disputes
Most consignment disputes come from vague or missing contract terms. A well-drafted consignment agreement should address at a minimum:
- The consignment period — how long the consignee can hold the goods before they must be sold or returned.
- Pricing authority — whether the consignee can change prices or offer discounts, and within what range.
- The commission split — exact percentage or dollar amount the consignee keeps per sale.
- Reporting frequency — how often the consignee reports sales and inventory counts.
- Payment terms — when payment is due after a sale is reported, and penalties for late payment.
- Insurance — which party insures the goods and for what perils.
- Return logistics — who pays shipping for unsold goods returned to the consignor.
- Termination triggers — events that let either party end the arrangement immediately.
Consignors should also include a clause requiring the consignee to keep consigned goods identifiable and separate from the consignee’s own inventory. Commingled goods are harder to reclaim in a dispute, and a bankruptcy trustee will have a much easier time arguing the goods belong to the estate if they can’t be distinguished from the consignee’s stock.