A consignment shop sells merchandise owned by others on "sale or return" status. The seller does not relinquish ownership and pays a percentage of the value to the shop owner for completing the sale. The shop owner takes his percentage from the total the buyer pays. The shop owner and the owner of the goods earn money from the transaction. A consignment transaction is taxable for state and municipal sales tax and is taxable income to both shop owner and seller.
Some states do not have sales tax, and Connecticut continues to exclude consignment sales from tax. Consignment businesses operating in those states have one less tax to collect and submit. If the state charges a sales tax, the buyer pays the tax. The shop owner calculates and adds the tax to the sale at time of purchase. The consignment shop owner must submit the tax to the taxing authority, usually quarterly or once a year. The state determines the frequency of tax submissions based on the volume of the business. Sales tax passes through the hands of the shop owner, but the buyer makes the actual payment. The owner of the goods has no role in collection or submission of sales tax in a consignment.
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The Internal Revenue Service expects both the consignment shop and the seller to pay taxes on profits earned from consignment sales. All income is reportable to the IRS. Whether you conduct consignment sales as a business or as a hobby determines whether you can claim a loss. It does not determine whether you claim the profit. You can use Schedule C, Profit or Loss from a Business, to claim expenses and profits for consignment sales. Your state income tax figures include the consignment shop sales if your state uses figures from the federal tax return for state income taxes.
If your profit is more than $400 in a tax year, you must pay self-employment taxes on your income from consignment sales. This is your Social Security and Medicare taxes that add work history needed for your retirement years. Self-employment taxes include both the employer and employee share. The employer share is 6.2 percent for Social Security and 1.45 percent for Medicare; the employee share is 4.2 percent for Social Security and 1.45 percent for Medicare in 2011. The employee share returns to 6.2 percent for Social Security in 2012 without the intervention of Congress.
If you have an occasional garage sale or have someone else sell a few items for you at a garage sale, the IRS does not require an accounting. When your garage sales, flea market sales, consignments sales or online auction sales become a business, you must claim the income on your federal income tax return. The IRS suggests that recurring sales or purchasing items to sell turns the garage sale into a business.