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Collecting Taxes on Your Cottage Food Sales
Many of the states that allow cottage food businesses (basically making and selling certain allowed food products from and out of your home) have lots of guidance except about taxes. Here are the basics. Of course, you should also check with your accountant or tax attorney. This is a layman's perspective!
Tax Jurisdictions
You need to find out what is the tax rate in your state, county, and city. The may each set their own sales tax rate.
Example:
State sales tax: 4%
County sales tax: 2%
City sales tax: 0%
In this case, you would need to collect 6% on the sales.
And if you sell from locations that are in a different jurisdiction, you will need to know the sales tax rate in effect at the location where the sale takes place. If you are allowed to ship items (most cottage food laws prohibit this) to your customers, you will need to charge the sales tax at the destination.
Here is one resource to help you understand it
Exemptions
Some cottage food items may be exempt from some jurisdictions taxes. For example the State of Georgia exempts the state portion of the sales tax. So, you need to verify whether cottage food sales are taxable at each level of jurisdiction.
Reporting and remitting
In order to report and remit (hand in) the the collected sales tax to the government, you will need to apply for a Sales Tax Number (STN) from your state's Revenue Department.
You will need to collect and submit information about the sales, including the total for each jurisdiction in which sales were made. Most states also require other information, such as about exempt sales. Reporting and remitting is usually done monthly.
Exemptions from pay taxes on your ingredients
You may be able to avoid paying sales tax when you buy ingredients. There is typically a form like a Sales Tax Certification of Exemption that you must complete. Not all vendors will sell you ingredients without collecting the sales tax. For example, the local grocery store is probably not able to remove the tax from your purchases. This usually only works with suppliers and wholesalers who specifically sell to businesses engaged in resale. Costco could, for example.
Tips and Gotchas
- You must keep and turn in the sales tax records monthly, even in months when you have no sales (obviously, turning in a report that shows zero sales for the month)
- Buying your ingredients wholesale and lower costs rather than from a retail store will greatly benefit your bottom line.
- Making larger quantities at once may allow you to buy larger quantities of ingredients and lower your costs.
- On the other hand, if the quality of your product is time dependent, you may be better off making smaller quantities more often and only making as much as you can sell before quality starts to decline.
- Many states offer free or low cost seminars on how to start your own business, such as SCORE. It is well worth attending these. Click here to find a Score workshop near you.