The short answer: It is a law that allows you to make certain types of food from your home kitchen, and then legally sell them at certain venues.
The long answer: During the 20th century, most states created a law which prevented homemade food from being sold for personal profit. In 1993, the first federal food code recommended that food made at home should not be sold in a commercial food establishment. Almost all states have now adopted some version of the federal food code, which has never changed its stance on selling homemade foods.
In the late 1990’s and early 2000’s, a select few states adopted laws to override that prohibition, allowing certain kinds of home food products to be sold — these were often known as “baker laws” or “pickle bills”.
Starting in 2007 and throughout the Great Recession, many more states started adopting such laws to help give their citizens an easier way to make some income, with the side-benefit of helping local economies. The term “cottage food” became popular as a way to describe these laws and the local home-based food businesses (also known as “cottage food operations”, or CFOs) that were cropping up throughout the country.
As the local food movement has become more popular, more states have added or improved “cottage food laws” to allow these home food businesses to exist legally. Cottage food laws are different in every state, but each law allows home food sales in some way. Most cottage food laws have limitations, such as what types of products are allowed, where a business can sell, and how much they can sell in a year. You can learn more about each state’s cottage food law here.