A Complete Checklist of Consignment Considerations
An alternative to shipping material on an open account is to ship the material to the customer with title to the material being still vested in the seller.
Under such arrangements, the customer must pay for the material as it is used or sold.
Unless specified otherwise, using it (conversion) requires the customer to pay for the material according to the terms of the consignment agreement. With exceptions, conversions of the consigned material without the owner's consent may be a violation of law in certain states.
A resale of material that the customer does not own may be voidable by the owner of the material unless the consignment agreement states otherwise. In such an event, the owner of the material may have a lien against the receivable from the third party.
Consignments are widely used in distributor-type operations where the manufacturer wishes the distributor to have a wide variety of inventory available to third parties but the distributor cannot carry a large inventory.
Use the checklist below if you are working on a consignment agreement with a customer and want to make sure you've covered all the bases. You should also double-check with your attorney.
| Consignment Considerations | ||
| Use this checklist to go over considerations you'll need to plan for if you're thinking about a consignment arrangement. | ||
| Covered? | Not Covered? | Item Being Checked |
| 1. Title. The right of ownership remains with the seller. The material cannot be resold or pledged to another without payment or settlement with the seller. Nor can such material be converted into another form without the seller's permission. | ||
| 2. Insurance. The seller should make certain it has sufficient insurance to cover the consigned merchandise. The seller should also make certain that their insurance covers consigned merchandise, not in the seller's physical possession. The other alternative is to require the buyer to provide insurance for the consigned products. | ||
| 3. Agreement. Care should be taken in the drawing of a consignment contract. Some courts have regarded such agreements as unrecorded conditional sales contracts. In such an event, the material may belong to the other party. | ||
| 4. Segregation. It would be desirable for the consigned material to be segregated and carefully labeled as belonging to the seller. | ||
| 5. Funds. Proceeds from the sale of consigned merchandise must be segregated from other funds received by the debtor for the protection of the consignor/seller. | ||
| 6. Reports. The consignee should provide to the consignor regular reports of removals from consignment stock and balances on hand and in transit at specified intervals. | ||
| 7. Taxes. In certain states and jurisdictions, the presence of consignment stock may create a "tax nexus" for the consignor, making them subject to, and liable for, local and/or state income taxes, franchise taxes, sales tax, and other taxes. Creditors should research this issue carefully before shipping on consignment. | ||