If you sell merchandise on consignment; that is, you assign your goods to someone else to sell for you, you would not have sales income subject to federal income tax until the consignee sells the merchandise. According to the IRS, you as the consignor retain title to the merchandise even after the consignee takes possession of the goods. You would not report a profit or loss until the consignee sells the merchandise.
The merchandise you send out on consignment remains in your inventory. Merchandise received on consignment is not included in the consignee’s inventory for federal income tax purposes. Both the consignor and consignee should keep separate inventories of consigned goods for book purposes to keep track of the merchandise.
As the consignor, you would report the revenue from the sale, and the commission or percentage you pay the consignee when the merchandise is sold. And the consignee would reports its profit or commission on the sale of the consigned merchandise when the sale is made to the final customer.
State and local sales tax would generally be charged by the consignee to the final customer when the consigned merchandise is sold. The consignee would file the sales tax returns and deposit the sales tax collected from the customers. The consignor would generally not be responsible for the sales tax on the sale to the customer.
The consignee must register with the state department of revenue and obtain a sale and use tax permit. If the consignor also makes sales subject to sales tax, in addition to consigning goods for sale, the consignor would also need to register and obtain a sale and use tax permit. Or the consignor may need to obtain a seller’s permit even if all sales are made on consignment, such as in California. But the California Board of Equalization also points out that if you make no more than two qualifying sales or consignments in a year, the sales are generally considered occasional sales, and you would not have to obtain a seller’s permit or report the sales or consignments.
The consignee may be able to present the consignor with a resale certificate for the merchandise acquired on assignment. This way the consignee does not pay sales tax on the acquisition of the merchandise from the consignor, and the consignor will not be held liable for the sales tax.
Depending on state and local law, the commission that the consignee charges the consignor may be subject to sales tax. For example, this is the case in Connecticut. You should check with your state’s department of revenue or equivalent agency, as well as any local taxing authority to see whether state and local sales tax applies on consignment commissions.
The IRS provides links to State Government Websites where you can find more information, such as whether both the consignor and consignee need to register and obtain a sale and use permit, whether the consignee can use a resale certificate, and how to report the consignment sales and commissions for state and local sales tax purposes.
Common Register Sales and Consignment Sales, Connecticut Department of Revenue Services
Publication 114, Consignment Sales, California State Board of Equalization
Publication 334, Tax Guide for Small Business, IRS
State Government Websites, IRS