Consignment inventory is a supply arrangement where a supplier delivers goods to a retailer but keeps legal ownership of them until the retailer sells them to an end customer. The retailer never buys the stock. It sits on their floor, they market it, and when a customer walks out with an item the retailer keeps a commission and pays the supplier the rest. Until that sale happens, the goods belong to the supplier, even though they are physically in someone else’s store. The model shows up most often in high-value retail, art galleries, used equipment dealerships, and specialty clothing stores, because it lets a retailer offer a wider selection without putting cash into merchandise that may not move.
The Two Parties
Every consignment relationship has a consignor and a consignee. The consignor is the supplier, manufacturer, or owner of the goods. They produce or source the merchandise, absorb the upfront cost, and usually pay to ship it to the retail location. Because they still own everything on display, they also carry the financial risk of unsold stock.
The consignee is the retailer or dealer who does the actual selling. They provide the floor space, handle merchandising, and deal with customers. Their incentive is simple: they fill their shelves without buying inventory and earn a commission on each sale. In exchange, they are expected to keep the goods in sellable condition, track what moves, and report sales back on a regular schedule.
Who Owns the Goods
Title stays with the consignor until a customer actually buys the item. That is the fundamental difference between consignment and a traditional wholesale deal, where the retailer owns the stock the moment it arrives with an invoice.
The Uniform Commercial Code treats consignment as a particular kind of secured transaction. Under UCC Article 9, a “consignment” has to meet several conditions: the consignor delivers goods worth at least $1,000 per delivery to a merchant who deals in goods of that kind, and the goods are not consumer goods in the hands of the consignee.1Cornell Law School. Uniform Commercial Code 9-102 – Definitions and Index of Definitions When the transaction qualifies, the consignor’s interest is classified as a purchase-money security interest in inventory under UCC 9-103(d).2Cornell Law School. Uniform Commercial Code 9-103 – Purchase-Money Security Interest; Application of Payments; Burden of Establishing That classification controls how the consignor’s claim stacks up against anyone else with a financial interest in the retailer’s assets, including banks, landlords, and other creditors.
Protecting Ownership With a UCC-1 Filing
Ownership on paper is not the same as ownership that holds up against the retailer’s creditors. To make the arrangement enforceable against third parties, the consignor files a UCC-1 financing statement. The filing is a public record that the goods sitting in the consignee’s store actually belong to someone else. It goes to the Secretary of State in the jurisdiction where the consignee is organized (for a corporation or LLC) or located (for a sole proprietor).3Cornell Law School. Uniform Commercial Code 9-301 – Law Governing Perfection and Priority of Security Interests Fees vary by state, typically from around $10 to over $100.
Timing matters. Because the consignor’s interest is treated as a purchase-money security interest in inventory, the financing statement has to be filed before the consignee takes possession of the goods. The consignor also needs to send written notice to any existing secured creditor of the consignee, such as a bank with a blanket lien on the retailer’s inventory, before delivery. Miss either step and the consignor loses priority over those creditors.2Cornell Law School. Uniform Commercial Code 9-103 – Purchase-Money Security Interest; Application of Payments; Burden of Establishing
What a Missed Filing Costs
This is where most consignors get burned. Under UCC 9-319, if the consignor fails to perfect the security interest, the consignee is treated as if they own the goods outright for purposes of creditors and purchasers. If the retailer goes bankrupt or defaults on a loan, their bank can seize the consigned inventory to satisfy debts. The consignor drops to the back of the line as an unsecured creditor. The goods are gone, and recourse is limited.
Keeping the Filing Alive
A UCC-1 is not permanent. It lapses after five years unless the consignor files a continuation statement before expiration. A lapsed filing has the same practical effect as never filing: the perfected interest is gone, and the inventory is exposed to the consignee’s creditors.1Cornell Law School. Uniform Commercial Code 9-102 – Definitions and Index of Definitions
Who Bears the Risk If Goods Are Lost or Damaged
Ownership and risk of loss are not automatically the same thing in a consignment deal. Even though the consignor owns the inventory, the written agreement decides who pays if goods are stolen, damaged by fire, or destroyed. Some agreements put all risk on the consignor and expressly release the consignee from liability regardless of cause.4SEC.gov. Form of Consignment Agreement Others shift risk to the consignee once the goods arrive.
Standard commercial property insurance typically covers only goods the policyholder owns, which leaves consigned inventory in a coverage gap. Consignees holding other people’s property often need bailee coverage, a form of inland marine insurance that protects goods belonging to someone else while in the consignee’s care. Without it, neither party’s policy may actually respond to a loss. A workable agreement names which party insures the goods and lists the other as an additional insured or loss payee.
How Payment and Commission Work
The consignee owes the consignor nothing until a customer buys an item. Once a sale happens, the consignee keeps a commission, typically 20% to 60% of the sale price depending on the industry and the consignee’s selling costs, and remits the balance to the consignor. These percentages get negotiated before any goods ship.
Payment runs on a cycle. Net-30 terms, where the consignee pays within 30 days of the invoice or reporting date, are common.5U.S. Chamber of Commerce. What Are Net Payment Terms? Payments should arrive with detailed sales reports: which items sold, when, and at what price. Most consignees use inventory management software to track consigned goods separately from their own stock, which keeps reporting accurate and makes reconciliation easier for both sides.
Consignors with significant inventory at a single retailer often reserve the right to audit the consignee’s records and physically count remaining stock. These audits catch shrinkage from theft, damage, or data entry errors before the gap grows. Annual audits are common, with quarterly checks on high-volume accounts.
How Consignment Is Taxed
The IRS is clear: shipping goods to a consignee is not a sale. The consignor has no taxable income at the moment of shipment because ownership has not changed hands. Consigned merchandise stays on the consignor’s books as inventory until the consignee actually sells it to an end customer.6Internal Revenue Service. Tax Guide for Small Business (Publication 334)
When the consignor recognizes that income depends on their accounting method. Cash-basis taxpayers report when they receive payment from the consignee. Accrual-basis taxpayers report when the right to receive payment is established, which is typically the date the end customer buys the item. For consignees, the commission or profit on the sale is income, recognized under the same accounting-method rules.6Internal Revenue Service. Tax Guide for Small Business (Publication 334)
Sales tax collection generally falls on the consignee, since they are the party making the retail transaction. Rules vary by state, and some states allow the consignee to remit sales tax to the consignor for reporting if the consignor is registered with the state’s tax authority. Consignors selling through retailers in multiple states should check whether their goods create a sales tax obligation in each state.
For financial reporting under ASC 606, the same principle applies: revenue is recognized when the consignee sells the product to the final customer, because that is the point at which control transfers. Until then, the goods remain on the consignor’s balance sheet as inventory even though they sit elsewhere.
Pricing and What Happens to Unsold Stock
Consignment agreements typically give the consignor sole authority over pricing. The consignee cannot mark down items without approval. Many agreements build in a markdown schedule for aging inventory, with reductions kicking in at set intervals (commonly 30, 60, and 90 days) to keep goods moving.
If items still do not sell by the end of the agreed consignment period, the consignor has the right to reclaim them. Consignment windows commonly run 90 to 180 days, though the parties can negotiate any timeframe. Once the period ends, the consignee is responsible for returning the unsold goods. Who pays return shipping depends on the agreement; some contracts put it on the consignee, some on the consignor, and some split it based on how long the goods sat unsold. Reclaimed inventory can then be redirected to a different retailer, routed through another channel, or liquidated.
What the Written Agreement Should Cover
A consignment relationship without a written contract is an invitation for disputes. The agreement does not have to be long, but it should settle every point where the parties’ interests diverge. That means pricing authority (who sets prices and approves discounts), the commission percentage and payment cycle, which party insures the goods and bears the risk of loss, the length of the consignment period and what triggers the return of unsold stock, how either side can terminate and what happens to remaining inventory on termination, the consignor’s audit rights, and confirmation that the consignor will file a UCC-1 with the consignee’s cooperation.
Pinning these terms down before the first shipment protects both sides. For the consignor, the agreement preserves ownership rights and creates enforceable payment obligations. For the consignee, it sets clear boundaries on what they owe and when, and limits their liability for goods they never owned in the first place.