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business licenses (long answer)

updated wed 30 apr 97


Olivia T Cavy on thu 17 apr 97

When I read this message I wasn't sure what was meant by a business
license, and I'm a CPA (licensed in Pennsylvania and Colorado)! This is
such a general term for a number of possible taxes.

You can get a federal ID #, also called an EIN (Employer ID Number)
which is optional unless you have employees. (You are not an employee if
you are self-employed.) However, I like my clients to apply for this
number on a short form called the SS4 because it's another of those
things that businesses do--as compared to hobbyists. If you may not turn
a profit initially, this may be an issue, and you are at risk for not
being considered a profit-seeking business entitled to fully deduct your
losses. If you run your business at a loss, you will want to look like a
genuine business. (The difference is that a hobby does not have a profit
motive, and you are not allowed to deduct any losses against other
income. You may deduct expenses only to the extent of sales.)

Each state with a sales tax also has another application (considerably
more complex) which you must complete if you are required to collect and
remit sales tax to the state. (Sometimes a state will issue temporary
sales tax numbers if you participate in a festival once or twice a year
in a state and that is the only time you are located in the state to
sell your work.)

If you live in a state with sales tax, you certainly want to get this number (ot
sales tax and remit it to the state) because it should give you a sales
tax exemption. This would exempt you (as a "manufacturer" or "reseller"
from having to pay sales tax on materials you use in the product you
sell. If you do pay sales tax on your materials, you can generally
deduct this from the sales tax you are required to remit to the state, based on

I am generalizing here because I understand that most states operate on
similar principles. However, I AM NOT A SALES TAX EXPERT, and would
highly recommend that you at least look to see what information is
available on your state's internet site and speak to the people at your state's
the field (as you as they are not auditing or investigating you) are
knowledgeable and interested in helping you understand the laws so that
you comply and send them tons of money. (Only joking about the tons of
money part. Maybe not.)

It is worth your while to understand your state's sales tax laws because if you
audited, you will be assessed and have to pay it. It is unlikely that
you can go back and collect it from the buyer, long after the sale. Also
there are penalties of sufficient size that most of us would not enjoy
paying back sales tax we failed to collect and/or remit.

There may also be additional Business Licenses issued by all sorts of
governmental bodies--probably local. In Monroeville, PA (for my small private CP
for a Business License. This registers me to pay them .4% (which is 4 mills, a b
make or not make. (My profit is taxed in Monroeville at 1.5%--on top of
the .4% tax on my gross receipts.) However, I know this ahead of time,
and although I may not be happy about it, I'm not surprised. If I were
to start selling my pots as a business, I would also have to pay another
$15 license for a Mercantile License and the same .4% gross receipts tax
(called a Mercantile Tax). I'm not writing this for sympathy (although
flowers would be nice)--just to mention that every state and many times
every burg/city/town/borough/county/municipality, etc. is different and
it is important to understand the rules where you work and sell.

That's why you may need to either investigate yourself or hire someone
like a local CPA to help you out, at least initially. ;-} I would
start by looking at my state's internet site. Then, to investigate these
issues by yourself, call the various taxing authorities and tell them
that you are hoping to start a business and would like information on
what licenses and taxes are required by them. Ask them if they could
suggest whom else you should speak to--county, state, etc. If you get
the right person, you'll be pleasantly surprised about the useful
information you can get. You may not be happy about paying the tax, but
you'll sleep better knowing that you are fully complying.

BTW as a CPA I inform my clients about all taxes I am aware of that they
may be subject to, and I ask if they want my help in either registering
and/or completing the tax forms. If they say, "No" I document this in my
files (to protect me) and this is the end of it for the year.

Hope this has been helpful--a long answer to a short question.

Bonnie Hellman in Pittsburgh, PA

>> Should potters go out and get a business license...I am unsure about
>> of this before I go out and get the tax ID number and such.
>Er, doesn't this (if a license is needed) depend on the state from
>you operate your business? And the tax ID always confused me, too. It
>seems like you *would* need a tax ID to sell through craft fairs
>YOU are collecting sales tax) and you *wouldn't* need one to sell
>galleries (because the sales tax would be collected through THEIR tax
>I've read several books on "starting your own craft business", etc...
>but none of them have convered the tax ID thing, which is why I'm
>that it varies by state. In that case I'd guess the best thing to do
>is to
>contact your local Small Business Administration (ugh, I know, but
>supposedly they know the local laws...)
>"How short the life, how long the craft to learn."