Taxes, Permits & Licenses for New California Businesses

After writing this information out about a dozen times in the last few years (especially since joining Etsy, where thousands of new shops are created every day), I've decided to post this information here in hopes that even more people will find it useful. I should add that I am not a tax professional nor am I an attorney, however I am a sole proprietor who has run a small business in two states, as well as participated in hundreds of craft fairs in many states over the last 30 years. As a reminder (see the title of this post above), this information is mostly for California artists, however those living in other states may benefit from this post as well.

You'll need a seller's permit. The Board of Equalization (BOE) issues this permit, at no cost to you. This permit is what allows you to collect sales tax on your sales. Of course, once you've collected the sales tax, you'll need to turn it in. The BOE will tell you what schedule you're on -- monthly, quarterly, annually, etc. Most new, small, businesses are on an annual filing schedule. The BOE will send you a form to fill out a couple of months before the sales tax is due. If you do art/craft fairs (or other events) in other states while living in California, those states may require you to obtain a sales tax permit or license from them as well -- however, please don't worry about this until you need to!

Your city or county may require you to have a business license -- even if you're only selling online or at craft fairs. Fees for local business licenses vary widely, from free to $100 or more per year. Call your city clerk and/or county clerk's office or go to your city's or county's web site and look for a link about "Doing Business in ..." This business license is strictly for the business, it doesn't have anything to do with sales tax. Some cities where you do art or craft fairs may require you to get a local permit. This is often included in the application fee for the show, however sometimes the show promoter will tell you how to apply for it directly.

For those of you starting businesses in 2009, you'll need to file business income taxes for 2009. This is the tax due on April 15, 2010. You'll need to complete Schedule C (Profit or Loss from Business) and Schedule SE (Self-Employment Tax) in addition to your 1040 and any other schedules or forms that you're required to file. Look at this year's Schedule C to get familiar with the various categories of deductions. I've used Schedule C for many years and it hasn't changed much in all that time.

Most small business owners like to set up a spreadsheet with a column for each type of deduction from Schedule C (rent, supplies, utilities, etc.). Be sure to save all business-related receipts for supplies or anything else related to the business. If you buy from someone who doesn't or can't give you a receipt (at a flea market, for example), write your own "receipt" with as much of the same information as you've got (date, location, seller's name if you know it, what the item was, how much you paid, etc.). If you're "organizationally challenged," put your receipts in a shoebox or envelope so they're all in one place when tax time rolls around. By the way, you don't need to worry about Schedule SE -- it's a short form and super-simple!

As for selling online, you don't need any additional licenses or permits to do that. At this time, sales tax is only collected on items shipped to a state where you have a "physical presence." [There has been ongoing debate for about a dozen years -- ever since the internet (and e-commerce/online shopping) really took off -- about changing this.] For small business owners, "physical presence" is generally defined as where you live, although when your business grows much larger and you establish a manufacturing facility in another state, then you'll have a physical presence in that state as well! If you happen to live in one state, but have a studio or shop in an adjoining state, you may have a physical presence in both states; if this is your situation, just check with the sales tax authority in both states and they can help you figure it out.