I have searched arround and haven't been able to find an answer that I can follow.
I am trying to make an item that can't be dropped or sold to vendor. It would be removed from players inventory if it is equiped when a custom spell is cast. The last part is easy, but I can't figure out how to protect the item. From my searching, it looks like I need to use quests for this, but I can't find a good example of how. Can anyone point me in the right direction?

The item needs to be pointed at by a ReferenceAlias on a Quest, and the "Quest Item" box must be checked. I believe this will give you what you want.