Hobby or part time business... at what point do you need to pursue licensing?

[Nate Thiessen]

I have been wanting to sell some items online through etsy and facebook, as well as go to a couple of farmers markets, however I am not sure about where the line is between selling items to fund a hobby, or when it becomes a business that the IRS can put their hands in to. According to a FAQ (or one of the discussions, can't find it now but when I can I will post the ling) on etsy, it is still constituted a hobby so long as the income does not exceed cost, and is not used as a primary income. If I wanted to have a booth at a farmers market or at a fair do I have to have a business license?

What is the line between hobby and business for blacksmiths who are selling items?

[John McPherson]

The IRS will not let you continue to claim a business that does not make a profit more than a certain percentage of years. That still does not negate the need for local and state business paperwork, yearly tax filings, record keeping, etc.

My state says that if I charge one dollar for a service or a product, I am in business and need to jump thru the hoops, or else. YMMV. Consult a professional, such as an accountant or attorney in your state.

[notownkid]

If I charge $1 for my work including labor I have to change Zoning, get a tax #, get some liability ins. keep books for when the fed or state revenue folks hear about me, (others at shows will turn you in you don't charge tax or display a tax # sometimes) plus who knows what.  Did all that in a former life no more.  If this is a hobby it will  have to  be a big one to generate the needed funds to make all the ends come together.  If brave ignore all of the above and hope for the best?

[rockstar.esq]

Nate,

Cities, Counties, and States will vary in terms of what they do and do not require.  It can be very difficult to get a straight answer out of whoever is answering the phone at these agencies.  I've learned the hard way that "help desk" answers can be limited to what you actually asked, rather than the obvious answer you needed.

One time, I asked a help-desk lady what forms were necessary for a permit application.  She listed off a few things so quickly I struggled to write them all down.  So I asked if there was a checklist of everything I needed to submit, she lifted her elbow off a stack of papers on the desk and handed me the needed checklist.  She had listed off only 1/3 of what was actually required. At the bottom of the checklist was a warning that an incomplete submission would be rejected and would require a completely new application (with the ensuing delays).

Another favored tactic is to direct you to their website which is invariably an IT quagmire.  For agencies that only handle things via online submission, I've found it's better to call their tech support and be nice while they help you through it.  I've learned to be cautious with online municipal licensing systems because it's very easy to make a mistake that will put the application into a limbo state where nothing's getting done, and nobody knows how to fix it.

Terms like "Owner" and "Contractor" may have completely different meanings to whoever wrote the software.  Messages that would tell the user what's going on are often scant on useful information.  For example, if you're setting yourself up as a contractor, the system want's to know who the owner is.  There's little to no effort to clarify if they're asking who owns the project you're building, or who owns the contracting business you're representing for the application.  Even if you enter everything perfectly, there's no message indicating that your submission is successful, or that there's a 24-48 hour review of the information before they'll kick it over to billing so you can buy your permit.  The permit might appear under "shopping cart", or "Documents", or "Files", or some incomprehensible acronym that doesn't look like a software "button". 

If you wanted to check the status of your application, they want you to do it online which requires a permit number.  Said number is not provided until it's kicked over to billing.  Since there's no confirmation that your application was submitted properly, you're in limbo wondering if they're dragging their feet, or if there was a mistake in your application.  If you panic and re-apply for the permit, 9 times out of 10 you'll get an email from the billing department for two permits! Then again, there's a one in ten chance that they'll reject both applications because the document review office can't/won't maintain multiple records for a single address.

Even with all of this being said, there's absolutely zero coordination between agencies of the same authority.  The tax people don't share anything with the permit people and so on.  If that isn't frustrating enough, more than one local city has a policy of conducting an audit of your books within 6 months of permit close out.

Sometimes it's a good idea to consider hiring a business/ tax lawyer to get your operation set up properly.  It might be cheaper hiring them on the front end than paying them to defend you later on.  Life is long and you don't always know how things will turn out.  More than one person saw their ambitions squashed when allegations of "tax evasion" were thrown around. 

I suspect a whole lot of E-tailers are violating rules nobody knows about.

 

[Gerald Boggs]

Some places are a quagmire of bureaucracy, others are quite easy, open and friendly, a quick visit to your local business license office will tell.   Here in Nelson county, Virginia, my thirty minute drive took longer then getting everything I needed done: Approval to have a blacksmith studio at my location and a $35 per year business license.  Plus a telephone call to the sales tax folks (on-line now days)

[Nate Thiessen]

On 7/18/2017 at 3:40 PM, notownkid said:

If I charge $1 for my work including labor I have to change Zoning, get a tax #, get some liability ins. keep books for when the fed or state revenue folks hear about me

Luckily I am in Montana so there is no sales tax. I do have a record for my online sales with proper invoice, but I do not have specific record for my booth at the town fair.

[rockstar.esq]

Just out of curiosity, does Etsy charge sales tax based on the buyer's location?

As I understand it, Illinois amended their tax laws so online retailers must charge the same sales tax as stores physically located in the state.  I'm curious if that means that Etsy/Etailer sites are getting Illinois tax licenses to handle this on behalf of their sellers, or if that's left to the individual seller to figure out.

I suspect Illinois is not the only state with such a law which implies that online sales can get a mite complicated.

Just cause I was curious, I googled "sales tax at craft shows".  My quick scan of results suggests this is not a simple thing.  For what it's worth I've never been charged sales tax at a craft show or a swap meet. 

For the career vendors, that's a pretty significant risk to take.  I know of several businesses that ran afoul on their taxes and none survived.

 

[Gerald Boggs]

No idea, a quick search didn't show that change in the law.  I do know that it comes up ever couple of years.  I had read that states are requiring on-line sellers like Amazon to collect if they have any warehouses/distribution centers in the state.

As for the shows, really not that hard, one just needs to get an out-of-state tax number and file as needed.  Some shows do the leg work for you, state will send you a onetime form to file.

[rockstar.esq]

Gerald,  I found an article from 2015 that specifically pertained to Amazon and Illinois.  Amazon didn't have any facilities in the state and Illinois was making them collect sales tax anyway.  The article suggested that state residents are "required" to pay and keep track of their sales taxes for all purchases.  It as acknowledged that compliance was quite low which may have precipitated the change in the law.

 

[Cavpilot2k]

I've been reading a bunch of these type posts on here lately, as I am selling a few widgets here and there on Etsy. 

I am by no means offering advice, because I'm just winging it at this point - and I may be wrong and in violation of law, but my understanding is that for small operations, you can just claim it on your personal income taxes via "pass-through" taxation. For instance, if you make a "business" in tax software, like Turbotax, you can claim deductions (like, say, tools and coal), and also claim sales proceeds, and it is all dealt with as part of your income taxes. I'm sure there are advantages to becoming a licensed business, but for hobby businesses, I don't see much reason to do more than that, unless required by your locality. 

Now I'm not sure about sales tax, because as of my last filing I hadn't sold anything yet - only deducted expenses to get up and running (forge, tools, etc), so I'll have to figure that piece out for my area. 

I think forming an LLC is a good idea, especially if planning on selling "weapons" (I am mostly interested in historical recreations, not becoming a "knife-maker). 

Again, I'm just looking into all this too, but am only interested in it as a hobby-business. 

[Kozzy]

Cavpilot--it isn't always that simple.  For "here and there" minor craft kind of sales, a ton of people tend to just skirt the law and never get caught but that's a risk which needs to be weighed for every situation and location.

Many states have really cracked down due to funding reductions (without going into political gobblydegook)  Some have cracked down remarkably hard...I'm sure you've even heard the odd story of things like kid's lemonade stands being hammered.  It actually happens if your attempts to be covert fail.

But there is also another issue that wasn't mentioned yet which bites HARD.  Property tax.  The language in most states specifies that a business must pay property tax on the equipment that is used in a business.  Even if you are just an average Joe that happens to be using your own tools for business purposes, theoretically those tools can become subject to property taxes just like your house (in most jurisdictions).  This one gets highly ignored but if you happen to run afoul of some over-zealous county official, they can nail you to the wall for not only current but back property taxes.  This is most common with "real" businesses that ignore the situation and have valuable equipment..like that guy with a fancy personal bulldozer who happens to use it for contract work once in a while.

I just got the property tax filing for my small business here...4 pages of equipment with depreciated values that the county wants their property taxes on.  The State pulled my filing for audit last year also and even checked up on me to "prove" out the list and show that it was honest.

As to sales taxes in other states, It's a nightmare:  There are over 7000 taxing districts in the USA and you are theoretically responsible for keeping track of it yourself.  Within that it can be even harder--for instance I have some California customers where one side of the block is subject to an RTA special tax in addition to the normals sales tax but the other side of the block isn't..and it's MY responsibility to suss that out.

In the "good old days", you were subject to out of state sales tax only if you had a "nexus" in that state and nexus was fairly clearly defined..for instance, traveling to that state more than once a year for business purposes.  That has all changed and the rules are impossible to figure out in many cases...CA even tried to say that placing advertising in literature (a simple small magazine ad for instance) which was distributed in the state constituted a nexus for sales tax purposes.

So....the best advice is to get legal from the first day if you plan on actually conducting business.  It's a horrible pain in the neck but the real problems come when you have ignored the law for a while thinking you were flying under the radar...and some over-zealous official decides to make you an example to scare others into doing following the rules.  Some distribution websites take care of all those state sales taxes for you so are well worth the hunk of change they take to list your product--but the other state taxes can be important to keep up with also.

So states do have "hobby" business defined also..or at least ultra-micro business.  Check your State's website to see if you (anyone) is thinking about selling...and you can often design around those rules to be legit with a bit less hassle than a bigger business.

Or...take the risk but be aware that you ARE taking a risk that may have a severe downside.  It's akin to not having fire insurance on your house. Sure, the odds of a fire are pretty slim, but if you have one the downside can be pretty large.

[dave in pa.]

Here is what I did...

Talked to several of my smithing friends who sell their wares to see what they do.

Most just wait until they get caught to do anything.

I have to believe that if anyone gets caught it will be me (and I can't afford it).

Went to H&R Block and found that the federal tax system (and my home state of Pennsylvania) have a form called Schedule C.

This puts anything that you make in the category of personal income and you pay taxes at whatever rate you are already at.

It also allows you to deduct for tools, materials, mileage, shop rent, table rent, insurance, taxes, and any related expenses.

In Pennsylvania... I don't need a business license or a tax number (but my apps are in and being processed now).

YMMV so talk to a professional about it and ask about Schedule C.

Hope it helps someone,

Dave

[Glenn]

Why not seek the advice of an accountant or tax professional that KNOWS the rules, regs, and law in YOUR state? 

[ThomasPowers]

Here in the USA you should be able to access the small business administration and get some help on this: https://www.sba.gov/