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Consignment Sales Tax 101
byApril 18, 2016
Consignment sales allow retailers to sell property that belongs to another without first having to acquire the property. This allows flexibility for both the retailer and the distributor. The state of Connecticut defines consignment sales to be:
…one in which the retailer, also known as the consignee, agrees to sell goods for the owner of the goods, also known as the consignor. In these situations, the consignee does not purchase the goods it sells on consignment from the consignor is for resale. Rather, the consignee charged as commission of fee to the consigner for selling the goods.
In other words:
- Consigner – the retailer selling consigned goods owned by the consignee (Ex: a consignment shop)
- Consignee – the person who owns the goods sold by the consigner (I.e. a seller who decides to sell some of your items in a shop on consignment)
In most cases, the property under consignment is transferred to the possession of the consignee where it stays until a buyer is found. Consignment sales come in two different types. One type, as defined above in Connecticut, involves the consignor being a sales agent for the consignee (owner of the goods). The sales agent completes the transaction but never takes title to the property and only keeps a sales commission for their work. This may be a common structure for the sale of art work, antiques, cars, and other unique or expensive property. Here, the sale is from the owner to the buyer with the consignor acting as only a sales agent. We will call this the “consignment agent scenario.” (Editor’s Note: This is the most common scenario TaxJar customers will likely face.)
Another type of consignment sale involves the transfer of property from the owner to the consignor until the consignor makes the sale on their account. This is often called a “sale or return” consignment arrangement. At that point, the consignor makes a purchase of the property from the owner and immediately sells the property to the buyer. In this case, the sale is between the consignor and the buyer. The owner is paid for the cost of the property sold and is provided a ‘resale certificate’ by the consignor for the purchase. This may be a common structure for newspapers, greeting cards, magazines, and other items that have a limited shelf-life and the seller does not want to assume the risk of owning the property. We will call this the “consignment resale scenario.”
For owners located in one selling property on consignment in multiples states the sales and income tax implications can be significant. Questions that should arise if you are a seller using either of the consignment methods described above include:
- Does consignment property create sales tax or income tax nexus in the state?
- Does payment of a commission create sales tax or income tax nexus in the state?
- What documentation is required to substantiate a sale for resale?
- What registrations are necessary to be in compliance with the tax rules?
- What impact do these consignment sales have on non-consignment sales made directly to buyers in the state?
Many states do not specifically address consignment sales in their tax rules and regulations. Over the years, there have been various rulings issued by some states and a few of these are discussed below. Generally, a multistate business, owning property in another state where the property is held for sale in that state, will create nexus in the state where the property is located. Further, if you have a “consignment agent scenario” where the consignor is paid a fee to sell the property, then nexus may also be created because of the presence of a sales agent in the state.
The significance of having nexus in the state will depend on the nature of the property being sold and the nature of the customer to whom the sale is made. If the property sold is statutorily exempt from tax or if the purchaser is exempt from tax, then having sales tax nexus in that state may be of little consequence. There may be income tax nexus issue to contend with, but those can be managed after the sale has occurred. In some states, the consignor may actually have the obligation to collect the sales tax even if they are only paid a sales commission and are not the actual reseller of the property. Further, some states make a distinction between “disclosed” sellers and “undisclosed” sellers and impose specific rules about sales tax collection based on whether the buyer knows who the consignee is.
If your business has multiple lines of sales, where some property is sold under consignment and other property is sold and shipped directly from your state to customers in a state where consignment property is also located, then, your company may be required to registration and collect tax on taxable sales made into the state. If all of your company’s sales are “for resale” then having nexus in the ship-to state may only mean that your company must collect resale certificates from customers. If sales are to final consumers then having nexus in that state will require that sales tax be charged and collected from all taxable customers, regardless of the sales method used.
Consignment Related Sales Tax Rulings
Following are some rulings and official materials in a few critical states that illustrate the problems and the range of sale tax consequences related to consignment sales. There is not a great deal of material published on this specific issue. I would caution any seller that holds property in another state as inventory for sale to carefully evaluate the sales tax rules in the state where the property is located. As noted above, there could be both sales tax and income tax consequences from owning property in another state.
Connecticut: Informational Publication (IP 2001(18), October 19, 2001.
Connecticut taxes a variety of services. One of the services subject to state tax is ‘sales agent service’ which may come into play with a consignment sale. Where the consignee is a sales agent for property owned by the consignor in Connecticut and is paid a commission for selling the property owned by the consignor, there are two separate taxable transactions when the property is sold. (This rule does not apply when the property being sold is artwork, clothing or footwear.)
When consignment property is sold, the consignee must collect from the customer the Connecticut 6.35% sales tax on the full retail price of the property. In addition, the consignor must collect 6.35% on the sales commission that is charged to the consignor. If consignment property is sold for $100.00 the consignee gets a 15% commission for selling the property, then the consignee must collect $6.35 in sales tax from the purchaser of the property and must charge the consignor $.95 in sales tax on the $15.00 sales commission. Consignor gets $84.05 as net proceeds from the sale.
Illinois: General Information Letter ST 08-0143-GIL (October 15, 2008)
In this letter ruling, the taxpayer inquired whether it had nexus in Illinois by virtue of the consignment relationships it had with two retailers. One of the retailers had nexus in Illinois and the other retailer did not have nexus in Illinois. The taxpayer was collecting Illinois sales tax on the consignment sales made by the retailer that had nexus in Illinois but was not collecting tax on sales made by the retailer that did not have nexus in Illinois.
Because the taxpayer did not follow the specific requirements for a formal letter ruling and because the Illinois Department does not provide nexus conclusions in letter rulings, the state did not provide a response to the letter. However, because the taxpayer was registered with the Illinois Department of Revenue and because the taxpayer was collecting and remitting on other sales made to Illinois, I would suspect that, upon audit, the state if Illinois would conclude that collecting sales tax on one type of consignment sale obligates the taxpayer to collect tax on all consignment sales.
Indiana: Dispatch No. 1, January 1, 2014
An out-of-state seller who consigns tangible personal property to an Indiana resident “on approval” is deemed to be engaged in business in Indiana, and must register as an Indiana Retail Merchant to collect Indiana use tax on such transactions. An out-of-state seller whose only business activity in Indiana is the consignment of tangible personal property to an Indiana resident on a “sale or return” basis is deemed not to be engaged in business in Indiana and is not required to register to collect Indiana Use Tax.
Have questions or comments about consignment? Here’s a vetted list of sales tax experts to consult. Or, start the conversation over in our Sales Tax for eCommerce Sellers Facebook group. Meanwhile, to learn more about TaxJar and get started, visit TaxJar.com/how-it-works.