"These products are the subject of regulation to protect children from the risk of fire which can result in severe disfiguring injuries or worse," Judge Cunningham said.
The Commerce Commission's investigation into NZSale was fuelled by a product recall in Australia for the same products, following an investigation by consumer watchdog the Australian Competition and Consumer Commission (ACCC).
A total of 73 units of the unsafe product was sold in New Zealand.
Eight garments were returned following the recall and 15 garments were confirmed as destroyed by consumers.
Commissioner Anna Rawlings said the sentencing of NZSale was one of a string of cases taken by the commission to improve retail compliance.
"It is important that retailers understand and comply with safety standards - especially when babies and young children are concerned. Flammable material should not be used for nightwear because of the risk of children being injured if it was to catch fire," Rawlings said.
"Parents should check the labelling of clothing so they are aware of the safety and suitability of children's nightwear when using heaters or fires."
NZSale gets its stock from suppliers in New Zealand, Australia, the US and UK, selling its product at discount outlet prices.
It sells products online and in 12 stores throughout New Zealand.
The Herald has approached NZSale for comment.