Consigned goods are products that an owner hands over to a retailer to sell on their behalf, while the owner keeps legal title until a customer actually buys the item. The owner is called the consignor, the retailer is called the consignee, and the arrangement runs on a mix of contract terms between the two of them and a layer of commercial law — mainly Uniform Commercial Code Article 9 — that decides whose claim wins if anything goes wrong.
Who Owns What, and Who Holds What
The consignor owns the goods the whole time they sit on the shop floor. The consignee has physical possession and acts as a sales agent: providing space, marketing the items, and dealing with customers. The relationship between them is a bailment, meaning the consignee holds someone else’s property with a duty to account for it.1William & Mary Business Law Review. Untangling the Web of Consignment Law Ownership transfers only when the end customer completes a purchase.
The arrangement is attractive on both sides. The retailer stocks inventory without spending cash upfront. The consignor gets shelf space without surrendering ownership, which is useful for new brands testing demand or artists placing work in galleries. The tradeoff for the consignor is loss of physical control and reliance on the consignee to handle the goods properly, report sales honestly, and return what doesn’t sell.
When the UCC Treats It as a Consignment
The ownership rule sounds simple, but from the outside, consigned inventory looks identical to inventory the retailer bought outright. A lender or creditor eyeing the shop can’t tell which items belong to someone else. UCC Article 9 is what sorts that out.
The Code defines a consignment as a delivery of goods worth $1,000 or more to a merchant who deals in goods of that kind, where the goods are not consumer goods immediately before delivery.2Legal Information Institute. UCC 9-102 Definitions and Index of Definitions When a transaction fits that definition, the consignor’s ownership interest is treated as a purchase-money security interest in inventory.3Legal Information Institute. UCC 9-103 Purchase-Money Security Interest In plain terms: to prove you still own goods sitting in someone else’s store, you have to take the same steps a lender would take to protect a loan secured by that inventory.
Filing a UCC-1 Is What Actually Protects You
The single most important step a consignor can take is filing a UCC-1 financing statement with the appropriate state office, usually the Secretary of State. UCC 9-310 requires a financing statement to perfect a security interest.4Legal Information Institute. UCC 9-310 When Filing Required to Perfect Security Interest Perfecting is the legal term for putting the world on notice that you have a claim to specific property. Filing fees typically run between $10 and $100 depending on the state and whether you file online or on paper.
Skip this step and the consequences are severe. If the consignor’s interest is unperfected, the consignee is treated as owning the goods outright for purposes of the consignee’s creditors and buyers. The retailer’s lenders can seize consigned inventory to satisfy the retailer’s debts, and the consignor has no priority claim to recover it. Most consignors who lose their goods assumed a handshake or even a written contract was enough. It isn’t. Without a public filing, the consignor’s ownership is invisible to the legal system.
There’s a second step for consignors placing goods with a retailer that already has an inventory lender. Under UCC 9-324, a purchase-money security interest in inventory only beats an existing secured creditor if the consignor sends that creditor written notice before the goods are delivered. Miss the notification and your claim can be subordinated even with a filed UCC-1.
What the Consignment Agreement Should Cover
The contract governs the relationship between the two parties; the financing statement protects the consignor against everyone else. You need both. A workable agreement spells out:
- A detailed inventory description, with quantities, condition, and any serial numbers. Photographs at delivery prevent later disputes over damage.
- Pricing terms, including a floor price the consignee cannot go below, and often a markdown schedule for aging inventory. A common pattern is 20 percent off after 30 days and 50 percent off after 60 days.
- Duration. Consignment periods typically run 30, 60, or 90 days. Perishable or seasonal goods need shorter windows; furniture or fine art may need longer.
- Commission split. State exactly how proceeds are divided. In retail consignment a 60/40 split (consignor/consignee) is common. Art galleries often keep 40 to 50 percent; used clothing shops may keep 30 to 40 percent.
- Risk of loss, insurance requirements, and whether the consignor is named on the consignee’s policy.
- Return procedures: who initiates the return, who pays shipping, and what happens if the consignor doesn’t collect on time.
- Sales tax handling. The consignee is generally responsible for collecting sales tax from the customer, since the consignee is the retailer completing the transaction.
- Payment timing. Many agreements settle monthly, some biweekly. The agreement should say whether the consignor is paid when the item sells or when the customer’s payment clears, since returns and chargebacks complicate timing.
Risk of Loss and Insurance
During shipment to the shop, the consignor usually bears the risk. Once the consignee accepts delivery, that risk shifts. A well-drafted agreement makes this explicit: the consignee carries all risk from delivery forward and holds insurance covering the full value of the consigned goods, with the consignor named as loss payee.5SEC.gov. Consignment Agreement
The right coverage is called bailee insurance, a form of inland marine insurance that protects property temporarily held by someone else. It covers theft, fire, water damage, and vandalism. Verify the consignee’s coverage before shipping anything. A standard commercial property policy does not automatically cover goods owned by someone else, and if the consignee’s insurance is short, the consignor absorbs the loss.
Recalled and Restricted Products
Taking goods on consignment doesn’t shield a shop from the normal duties of a retailer. Under 15 U.S.C. § 2068, it is illegal to sell, offer for sale, or distribute any consumer product that has been recalled or banned.6Office of the Law Revision Counsel. 15 US Code 2068 – Prohibited Acts The Consumer Product Safety Commission says this applies to consignment stores, and resellers are expected to check recall status before taking items into inventory.7Consumer Product Safety Commission. Resellers Guide to Selling Safer Products Recalled items should be destroyed, not donated, unless they’ve been repaired per the recall.
Some categories carry extra rules. Firearms consignment requires the consignee to hold a federal firearms license; a shop taking physical possession of firearms for sale on consignment is engaged in the business of selling them and must be licensed before any transaction.8ATF eRegulations. 27 CFR 478.41 – General
Taxes on Consignment Income
The IRS taxes consignment income like any other income. How you report it depends on whether your activity is a business or a hobby, which the IRS evaluates based on factors like whether you operate in a businesslike way, keep accurate records, depend on the income, and intend to make a profit.9Internal Revenue Service. Here’s How to Tell the Difference Between a Hobby and a Business for Tax Purposes
If it’s a business, you report income on Schedule C and can deduct related expenses like shipping, storage, and materials. Net profit above $400 is also subject to self-employment tax.10Internal Revenue Service. Schedule C and Schedule SE If the activity is a hobby, you still owe income tax on earnings but can’t deduct expenses against them.
Online platforms may issue a Form 1099-K if payments exceed $20,000 across more than 200 transactions in a calendar year.11Internal Revenue Service. Understanding Your Form 1099-K Income is reportable whether or not you receive a 1099-K. For direct payments from a brick-and-mortar consignee, the 2026 reporting threshold is $2,000, up from the previous $600.12Internal Revenue Service. 2026 Publication 1099
Getting Unsold Goods Back
When the consignment period ends, unsold items go back to the consignor. The agreement should spell out who initiates the return, how long the consignor has to arrange pickup, and who pays shipping. A typical arrangement allows the consignor 7 to 14 days after a pickup notice to collect the goods. Both parties should sign a final inventory reconciliation listing what’s being returned and in what condition.
Dragging your feet on retrieval can cost you more than storage fees. Most states have abandonment statutes that let someone holding another person’s property claim it after a defined period of inactivity. Timeframes vary by jurisdiction, but the principle is consistent: if you ignore notices and don’t collect, you can eventually lose your claim. The agreement should state how many days of non-response count as abandonment.
If the Retailer Goes Bankrupt
Retailer bankruptcy is where the UCC-1 filing either saves you or sinks you. When a retailer files, an automatic stay immediately freezes creditor collection efforts and property seizures from the estate.13Office of the Law Revision Counsel. 11 US Code 362 – Automatic Stay That stay applies to consigned goods on the shop floor. You cannot walk in and reclaim your inventory.
If you filed a UCC-1 and sent the required notice to any prior inventory lender, your purchase-money security interest gives you priority over the retailer’s general creditors.3Legal Information Institute. UCC 9-103 Purchase-Money Security Interest You still have to work through the bankruptcy process, typically by filing a motion for relief from the automatic stay, but you have a recognized legal claim to your specific goods.
If you never filed, the bankruptcy trustee can treat your consigned goods as part of the retailer’s estate. You get lumped in with every other unsecured creditor, which in most retail bankruptcies means recovering pennies on the dollar or nothing. The UCC-1 filing fee is one of the cheapest forms of insurance a consignor can buy.