Talk with others about the cottage food industry in Virginia
Virginia Cottage Food Laws and Sales Tax
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- February 27, 2015 at 9:43 am #16790
I have been making chocolates for a while and people have begun to ask to purchase them. I have spent untold hours searching the Web and calling people in the government (without success) to get a straight answer to the question: is someone selling items under the cottage food laws in Virginia required to collect the sales tax? The answer from the tax people is the reflect one: yes, every sale (with a few exceptions) is taxable, but the person did not seem to be sure of her information. Chocolate-making remains basically a hobby for me, and I have no desire to set up a business. I have reported my small income from chocolates on my federal tax form under hobby income. From the IRS point of view, a person has either a hobby or a business, with various distinctions between them. Yet to submit any sales tax to the state, I need to apply for a business license. I am quite confused at this point, and any help would be appreciated.February 27, 2015 at 3:12 pm #16791
Setting aside the sales tax question temporarily, I just want to make sure that you’ve gone through the steps to make sure you’re running your business legally. Are you sure that your county doesn’t require you to get a business license for your chocolate business? More general info: http://forrager.com/faq/#starting
From what I understand, a hobby classification is more intended for a business that has no intent to profit from it, or has not profited from it for the majority of the past five years. Hobbies cannot take business deductions because of this. Any activity for which you intend to make a profit is considered a business, no matter how small it is. Even if you are classified as a hobby, I don’t think that would affect the way that your state or county classifies you.
Getting back to sales tax… if govt officials aren’t sure about sales tax requirements, then I wouldn’t fully trust any answer you get from someone online. They are the ones enforcing the rules, and they need to know these things. Generally, if you are selling something that is consumed off the sale premises, there can be exemptions (especially at the state level) for sales tax, but often each county and city has their own tax rates that don’t include exemptions. I don’t know more than that, but I do know it can be frustrating to hop from one official to the next and get conflicting answers.February 28, 2015 at 6:52 am #16802
Thank you for your reply. Let me respond to a few of your points:
“Even if you are classified as a hobby, I don’t think that would affect the way that your state or county classifies you.”
I think that may be the key point. I am far from making a profit from chocolate-making. I sold the chocolates only because people requested it last Christmas, and I don’t intend to get into the business; it is truly a hobby for me. I give away almost all I produce to charity events to raise money and as gifts to family and friends. So it is, from the IRS point of view, definitely a hobby, not a business. But I am beginning to conclude that the only way to pay the sales tax to the state (local taxes are not separate from the state) is to be set up as a business. It all seems more than a little absurd since I spent literally thousands of dollars on ingredients and equipment with no prospect–and no expectation–of ever earning a profit.
“Generally, if you are selling something that is consumed off the sale premises, there can be exemptions (especially at the state level) for sales tax”
Alas, Virginia does not seem to have that exemption.
And you are correct about the frustration I experienced in talking to various state officials. I even called the office that supposedly handles the cottage food laws and was told I would need to have a kitchen inspection. I said I did not think that was the case under the law, and the person said, “Well, I don’t know anything about that.” And these are the people who are paid to know!February 28, 2015 at 6:26 pm #16806
By definition, a business intends to make a profit. That’s why the IRS will classify you as a hobby if you take a loss for too many years in a row. It is for that reason that I don’t think your gifts or donations could be deducted as a “loss” for your business. If you take the sales you’ve made and deduct the variable expenses for ingredients/packaging, are you still operating at a loss? Only those sales/products constitute your business, and you can deduct large equipment expenses over time. In most places, to be operating as any kind of business requires you to get a business license, regardless of whether there is a need to collect sales tax.
By the way, I know that there are ways for businesses to make charitable donations and take deductions on their taxes from those — so your donations wouldn’t be out of the equation in your business — but I’m totally ignorant about how that all works.
It’s good to hear that the person thought you needed an inspection. I’ve been picking up pieces about VA from various people. I think that home food production used to be allowed before the cottage food law came into play, and although those rules still are used, depts may not be familiar with the new law that introduces many more restrictions, but requires less/no interaction with them to start a business.
Did you contact Heath Gerber at the ag dept (he’s listed on the law page here). If he doesn’t know about the cottage food law, then I’d really like to know that!March 3, 2015 at 8:32 am #16845
I tried to reach Heath Gerber, but the phone number provided on your site leads to a message that says the number is no longer operational and refers callers to 804-786-3520, which is identified as the Office of Dairy and Foods. There was no one to take my call at the second number, but I was given an opportunity to leave a message. I thought you might want to have this information for forrager.com.
Meanwhile I have contacted one person listed on forrager.com as having a CFO in Virginia, but it turned out that she never actually set it up. She in turn referred me to someone else. That person does operate under the cottage food laws, but has not registered the business and does not collect the sales tax. I have reached the conclusion that establishing my chocolate operation as a business means (1) registering as a business in Virginia, (2) submitting the sales tax on a monthly basis, (3) applying for an occupancy permit from my city, which requires an inspection of my house, including the amount of parking I have available, (4) registering the name of my business with the clerk of the circuit court, (5) obtaining a local business license, which also requires (6) obtaining a federal EIN (even though I have no employees). This is more than I am willing to do just to sell a few boxes of chocolates. So I have reached what will seem a radical solution to some people: I am going to give the chocolates away; after all, it is mostly a hobby for me anyway and I never anticipated major sales. In return for the chocolates, I will request that, in lieu of paying me, “customers” make a contribution to a qualified charity. They can select a charity themselves or pick one from a list that I will provide on my website–mostly local nonprofits but also organizations such as the American Cancer Society and the American Heart Association (I decided against including the American Diabetes Association to avoid the all-too-obvious irony of the connection to chocolates). In my opinion, CFOs need to lobby states for fewer regulations–for example, a state might exempt a CFO making less than $1,000 a year from the sales tax. I contacted a former commissioner of revenue in my area to get her take on all this. She lowered her voice and confided that probably 90% of people who sell foods they have made in their homes sell these items outside the law, and the revenue office rarely if ever goes after them. I am not OK with operating outside the law, and thus my new charitable venture!March 3, 2015 at 5:56 pm #16857
Thanks so much for the info about that phone number now being invalid! I’ll remove it.
The list of requirements you’d need to go through sounds about right. For a tiny business, it’s not really worth it. The statement that most home food businesses don’t operate under the law also sounds right. And considering that you’re not willing to operate illegally, I think your solution is a great one!November 15, 2018 at 4:56 am #42941
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I agree with you!November 15, 2018 at 4:58 am #42942
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advise best tax consultant near me yourbooksontime.comJuly 23, 2019 at 7:49 am #48513
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