Taxes on Arkansas cottage food sales

The exemption never touched taxes

The Food Freedom Act exempts compliant homemade food from licensing and inspection. It exempts nothing from taxation: Arkansas Code § 20-57-507 says the Act does not exempt producers from any applicable tax law.

Three taxes can reach an Arkansas food seller: federal self-employment tax on profit, state and local sales tax on what you sell, and, for an LLC, the annual franchise tax. Each follows a different trigger, and none of them follow the exemption.

This page walks each one. For the food-safety side of the same stall, which owes no tax at all, see the Food Freedom Act explainer.

Arkansas Code § 20-57-507Arkansas Code § 20-57-507(a)(6) states that the Food Freedom Act does not exempt producers or sellers of homemade food or drink products from any applicable tax law. — Arkansas General Assembly (Act 1040 of 2021), retrieved 2026-09-29

Federal: self-employment tax at $400 of net earnings

Self-employment tax applies once net earnings from self-employment reach $400 or more for the year, at 15.3 percent: 12.4 percent for social security and 2.9 percent for Medicare.

The $400 threshold is about net earnings, not gross sales. A producer who sold $3,000 of jam and spent $2,900 on fruit, sugar, jars and market fees has $100 of net earnings and no Schedule SE that year. The one who earned $600 owes it.

Net earnings means profit honestly computed: revenue minus the cost of ingredients, packaging, labels, mileage, market fees and the pH meter. The Schedule SE arrives with the Schedule C on the same return, and the habit that makes both painless is the same one the batch notebook started, per the batch records page.

$400The IRS requires Schedule SE when net earnings from self-employment are $400 or more, at 15.3 percent combining 12.4 percent social security and 2.9 percent Medicare. — Internal Revenue Service, retrieved 2026-09-29

State sales tax: what changed January 1, 2026

From January 1, 2026, food and food ingredients are exempt from state sales and use tax in Arkansas, under the Grocery Tax Relief Act, Act 1008 of 2025.

The exemption follows the food's legal category, not the seller's. Most of what a cottage food producer sells is food and food ingredients, so the state's 6.5 percent line no longer applies to it. Prepared food stays outside the exemption, and candy and soft drinks remain fully taxable, with the Department of Finance and Administration publishing a UPC list to sort them.

The producer's position is unchanged by the exemption: a seller making taxable sales in Arkansas still registers, collects and remits what applies, which after January 2026 means local tax on food and full state plus local on whatever taxable lines the stall carries.

January 1, 2026Arkansas's Grocery Tax Relief Act, Act 1008 of 2025, effective January 1, 2026, exempts food and food ingredients from state sales and use taxes, with prepared food outside the exemption. — Arkansas General Assembly (Act 1008 of 2025), retrieved 2026-09-29

Arkansas Code § 26-52-323, as amended by Act 1008 of 2025, requires the DFA secretary to publish a UPC list for items that are candy or soft drinks but not food and food ingredients. — Arkansas General Assembly (Act 1008 of 2025), retrieved 2026-09-29

6.500%Arkansas Code § 26-52-323, as amended by Act 1008 of 2025, requires the DFA secretary to publish a UPC list for items that are candy or soft drinks but not food and food ingredients. — Arkansas Department of Finance and Administration, retrieved 2026-09-29

Local tax: the line the state exemption left standing

The Grocery Tax Relief Act ends the state's share only. Municipal and county taxes on groceries continue to apply, and the Act says so in its legislative intent, which keeps food and food ingredients subject to the local gross receipts acts.

Practically, that means a Fayetteville stall and a Little Rock stall charge different totals on the same jar, because each city and county carries its own rate, collected on top of the now-zero state share on food.

So the pricing habit this page recommends is the same one retailers use: look up the combined local rate for every location where you sell, city and county, and bake it into the shelf price. A stall that treats the state exemption as "no sales tax at all" is quietly under-collecting the local line every market day.

Arkansas's Grocery Tax Relief Act keeps municipal and county taxes on food and food ingredients in place while exempting them from state sales and use tax. — Arkansas General Assembly (Act 1008 of 2025), retrieved 2026-09-29

The permit question: who registers with DFA

Anyone transacting business in Arkansas generally registers with the Department of Finance and Administration for the sales tax obligations that apply to what they sell. After January 1, 2026, an all-food producer may owe no state tax on the food itself, but the local line still needs collecting and remitting where the localities charge it.

The honest answer for a producer whose entire line is non-TCS food and food ingredients is that the obligation shrank rather than vanished: local tax on food, and full tax on any candy, soft drinks or prepared food lines the stall carries.

The registration and the local rates are one conversation with DFA or its website, and it is cheaper had before the first taxable sale than after. The Department of Health's permit exemption, which is what the Food Freedom Act actually grants, has nothing to do with this registration, and the two are often confused for each other.

6.500%The Arkansas Department of Finance and Administration administers sales and use tax registration for businesses transacting business in Arkansas, and states the state sales and use tax rate is 6.500%. — Arkansas Department of Finance and Administration, retrieved 2026-09-29

The LLC line: $150 every May 1

If the business is an LLC, the annual franchise tax report and $150 payment are due on or before May 1 each year, with no extensions available, and a $25 late penalty plus daily interest after the date.

The report is filed with the Secretary of State, online or on paper, and the tax contact the LLC lists is who receives the reminders. Miss it and the penalty is small but the interest runs daily, and the 2026 form lays out the arithmetic on its own back page.

That is the entire state obligation an LLC adds on top of the taxes above. Whether the LLC is worth $150 a year plus the shield is the structure question, and the deadline itself is on the LLC page.

$150 due May 1The Arkansas Secretary of State's 2026 annual LLC franchise tax report states all LLCs owe $150.00 if timely filed, due May 1, with a $25.00 late penalty plus daily interest and no extensions. — Arkansas Secretary of State, retrieved 2026-09-29

Hobby or business: the question the IRS asks

The IRS distinguishes a hobby from a business by the intention to make a profit, and lists factors that weigh toward business: time and effort spent to make it profitable, changes in methods to improve profitability, past success making profit in similar activities, profit in some years, and expected future profit from appreciating assets.

For a food producer this is rarely in doubt. A producer who prices, buys by the case, tracks batches, files the labels and shows up at the market every week is operating a business, whatever the size.

The distinction matters at the edges. A hobby reports income without the business deductions, on Schedule 1 of Form 1040, which is the worse side of the line for a producer with a pH meter's worth of expenses. The factors are the IRS's own, and they are worth reading once a year, alongside the habit that answers all of this: keep the records, per the batch page and the cost page.

The IRS states a hobby is an activity pursued without an intention of making a profit, and lists factors including time and effort to make it profitable and past profit-making success. — Internal Revenue Service, retrieved 2026-09-29

The IRS states a hobby is an activity pursued without an intention of making a profit, and lists factors including time and effort to make it profitable and past profit-making success. — Internal Revenue Service, retrieved 2026-09-29

Questions