Consignment Programs and Income-Tax Nexus

A consignment program can help a medical-device manufacturer enter the U.S. market without making a conventional wholesale sale when goods are shipped. It does not, however, make income-tax nexus disappear. Tax authorities generally examine the complete operating model: who owns the devices, where they are held, what occurs at each site, who contracts with the customer, and how revenue is received and allocated.

Why Does Title Retention Matter?

Under a traditional consignment arrangement, the foreign manufacturer may retain title until the device is used, implanted, purchased, or otherwise released. The manufacturer may therefore own tangible property physically located in one or more states. Some states treat in-state inventory as sufficient presence for corporate income, franchise, gross-receipts, sales-tax, or other business-tax purposes, although exemptions for certain unaffiliated fulfillment arrangements may apply.

Transferring title to a U.S. distributor upon receipt can remove the foreign manufacturer’s ownership of the site inventory. This may materially improve the state-tax analysis, but it is not conclusive if the manufacturer continues to control the inventory, direct customer activity, or conduct other business in the state.

What Activities Occur at the Consignment Site?

Inventory used solely for storage, display, or delivery may receive limited protection under some income-tax treaties, depending on the treaty language and the overall facts. That protection can weaken when the location supports core commercial activity rather than a preparatory or auxiliary function. A manufacturer without applicable treaty protection must instead be assessed under domestic U.S. trade-or-business and effectively connected income rules.

Installation, training, case support, maintenance, inventory reconciliation, customer negotiations, account collection, or authority to bind the manufacturer may also change the analysis. At state level, these activities can exceed the narrow protection under Public Law 86−272, which applies only to certain solicitation activities involving tangible personal property and only against qualifying net-income taxes.

Why Do Contracts and Payment Flows Matter?

The agreements and payment mechanics should identify the seller, when a sale occurs, who invoices the customer, who bears bad-debt and obsolescence risk, and whether the U.S. party earns a margin, commission, service fee, or combination of amounts. Routing customer payments through a U.S. entity does not determine nexus by itself, but it can affect receipts sourcing, gross-versus-net reporting, transfer pricing, income attribution, and the credibility of an asserted agency or distribution model.

A consignment program should therefore be reviewed as an integrated tax structure rather than as an inventory arrangement alone.

Map the Operating Model Before Launch

MDD Options can help map the operational facts that drive this analysis, including contracting flows, inventory ownership, consignment arrangements, personnel, invoicing, 3PL activity, and the roles of the foreign manufacturer and any U.S. entity. We can then coordinate those facts with state-tax advisers so that filing exposure and compliance costs are identified before the launch model is implemented.