Owning your own food business comes with all the perks of being a self-sufficient creator. All your great ideas and products stem from you, your knowledge, and your kitchen. Along with the development of your recipes and understanding the basics of cottage food, it is important to be aware of the cottage food sales tax requirements in your state.
Cottage food is typically defined as food items that are produced in a home kitchen. Sales tax is a tax that is applied to the cost of the product when sold to a consumer, which can be a combination of city, county, and state taxes. The consumer is normally the one responsible for paying the sales tax on the product they are buying. However, if the consumer doesn’t pay the sales tax for your cottage food, the government will hold the business responsible to cover the amount.
On the bright side, more than half of the states do not require a cottage food sales tax, as most states do not apply taxes to grocery items. States that are not yet exempt from sales taxes on groceries are Alabama, Arkansas, Illinois, Missouri, Tennessee, Utah, Virginia, Hawaii, Idaho, Kansas, Oklahoma, and South Dakota. States that include sales tax in their groceries base are Alaska, Hawaii, Idaho, Kansas, Mississippi, Oklahoma, and South Dakota. Generally knowing whether grocery items are tax exempt is helpful when determining whether or not you need to collect sales tax, but it doesn’t always mean there is no sales tax attached to the cottage food you are selling.
For example, Georgia’s grocery items are tax exempt but local taxes can still be applied. States like Colorado, Georgia, Louisiana, and North Carolina are all exempt from state sales tax, but products may still be subjected to local taxes. It all varies depending on your state, where Indiana does not require sales tax on grocery items and Alabama requires grocery items to be taxed at a normal rate. However, many of the states that do include a sales tax are typically taxed at a reduced rate and not fully like Alabama. It can be confusing, but it’s important that you understand how sales tax applies to your business.
Remember, when you are making in-person sales, your sales tax rate should be the combined sales tax rate in the state, county, and city where you are specifically selling. For instance, if you are selling at a farmers market in Honolulu, you need to collect Hawaii sales tax, as well as sales tax for the city and county of Honolulu. If you’re allowed to ship your cottage food, which most cottage food laws prohibit, you should charge sales tax based on the laws where your product is being sent.
The sales taxes applied to cottage foods are an extra step in the process of legally selling your homemade food. For the most part, it’s not even a worry you’ll need to have when starting your home-based business. Most states do not apply a sales tax to their cottage food — but it’s still a part of your responsibility as a self-sufficient business to double check! You can start with your city’s taxes, examine your county’s taxes, and then end on your state’s sales tax to see how they add up and if they apply to your products.
Still have questions about collecting sales tax on your cottage foods? Always consult a tax professional or accountant for confirmation on your locality’s tax rules.