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QUESTION: I sell embroidered clothing over the Web from Massachusetts home. Since clothing isn't taxable in Massachusetts, do I have to file for a sales tax license? Do I need to file for any other licenses? Since I'm a sole proprietor, do I only need to report the income on my personal tax return? Do I need to file annually or quarterly?
ANSWER: Operating a homebased business requires the same basic legal steps as operating a business elsewhere. Some home businesses require a general business license, a home occupancy license and a specialty license.
The permits, registrations and licenses required vary greatly according to locality and the nature of your business. Chances are, you need a business license from your municipality. Virtually all cities and counties require that all businesses obtain a business license, strictly for the purpose of raising money for the city or county rather than to regulate the businesses' conduct, much like the manner in which restaurants are supervised for sanitary conditions.
Since Massachusetts doesn't impose a sales tax on clothing and you'll be selling to out-of-state customers, it seems you're free of the burden of collecting and accounting for sales tax revenue. To be absolutely sure, however, get the written regulations from the agency that collects sales tax in your state. If what you read leaves you doubting, consult an attorney.
Although you've chosen to operate as a sole proprietor, allowing you to report your income on your Form 1040, you'll likely need to file quarterly, not annual, estimated taxes. And beware: If your state has a income tax, you have to file not only to the federal government, but to the state as well.
Small-business experts Paul and Sarah Edwards recently released their second edition of Getting Business To Come To You (Tarcher). If you have a question regarding a start-up business issue, contact them at http://www.paulandsarah.com or send it in care of Entrepreneur.