Know Some Rules
It’s a good idea for buyers and sellers to know some of the nuts-and-bolts to the consignment business and how to protect themselves.
For sellers, also known as consignors:
- Get your consignment agreement in writing. It should specify how much your property will sell for, how long the shop (called the consignee) has to sell it, how much you and the shop get out of the sale, and how long the shop has to pay you after the sale
- Remember, the shop is normally responsible for keeping your property safe. Your consignment agreement should specify who’s responsible for insuring your property
- As a general rule, you don’t have to pay taxes on items you sell. The IRS assumes you’re selling things you bought for personal use and for less than what you paid for them. But, you may have tax issues if sell something at a profit or if you make a living from frequent sales
For buyers, the tried-and-true adage applies: Buyer beware. Yes, you can find bargains at consignment shops. But, if it looks too good to be true, it may be. As a general rule, just like any other store or business, it’s illegal for consignment shops to sell anything it knows – or should know – is stolen or counterfeit.
Also, remember the consignment shop is working for you. If the shop hands-over your property but a a buyer doesn’t pay – or the shop doesn’t pay you, like the California case, it’s the shop who’s responsible for your money.
Sellers also need to know what might happen if the shop goes bankrupt. If it does and your goods are still in the store, the store’s creditors may be able to take your property to pay the store’s debts. Even though it’s your property.
There is some protection, though. Most states have laws protecting your property. Many states follow the Uniform Commercial Code (UCC). It’s a set of laws covering many types of sales transactions. Under the UCC, you can stop the shop’s creditor’s from taking your property by:
- Filing a UCC Form 1 after signing the consignment agreement. Usually, the form needs to be filed in your county’s recording office, or you may need to file it with the secretary of state’s office in your state
- If you don’t see one in the store, ask the owner to post a sign, visible to everyone, stating that the goods are consigned
- Prove, in bankruptcy court, that the store’s creditors knew the items in the store were consigned
If everyone’s careful, selling and buying at consignment shops is win-win for everyone.
Questions for Your Attorney
- What should I do if I notice fake or counterfeit goods for sale in a consignment shop?
- Do I need a license or anything to open a consignment store?
- The consignment shop where I was trying to sell some things suddenly closed and the store’s empty. What can I do?