California Garment License for Out of State Companies
Refresher: Anyone manufacturing sewn products and clothing in the state of California needs to pay a fee and pass a test to be granted a special license. It doesn’t matter if you’re working out of your home and don’t even own a sewing machine. It doesn’t matter if you’re producing items for pets or technical applications rather than people. If either you or your vendor needs a sewing machine to make your product, you need a license.
From a posting of one of our members, I was surprised to learn that anyone using a California contractor also needs a license. I interviewed a woman I’ll call Amelia -a resident of Utah- about how she learned of it and how she went about getting her license. First a little bit about her.
Amelia has always loved fashion but she never went to school for it. Her dad wanted his daughters to be able to support themselves so he strongly encouraged technical education. No slouch himself, he has degrees (5) in electrical and mechanical engineering, history, meteorology and an MBA. So, although she was awarded a scholarship at the prestigious Art Institute of Chicago, Amelia majored in math. After several years working as an encryption analyst for an engineering firm, she decided to try her first love -fashion. She’s been at it about three years now and has recently launched a second line. For the first two years she was manufacturing in China but decided she wanted to do it domestically (topic for another entry). That’s how she came to discover the licensing problem in California. Also, she stresses that she thinks this is a terrific industry and the last thing she’d want to do is discourage anyone.
She found out about the licensing requirement due to a bad experience that happened to a friend of hers. Her friend (a resident of California) was working out of her home with an assistant. There they made patterns and a few samples. Production was jobbed out to vendors. Her friend found out she needed a license after a state auditor came to her house; the location listed as the place of business. That’s when she found you can’t sew in a residence or even hire someone to sew for you out of their home. Worse, not only did she need a license but her assistant did too because she was working under 10-99. Her friend was told she needed to have a separate location for the business with a separate mailing address. All told, she was facing penalties of eight thousand dollars. The fines were later reduced to $1,500 because the auditor could tell she was really trying but she was placed on probation and had to put five thousand dollars in an escrow account for three to five years. Pending future audits, she’ll get the money back.
Based on her friend’s experience, Amelia -again, a non-resident- asked around to see if she’d need a license because she used a contractor in California (she has another contractor in TN). She was told she did need one but she couldn’t find out any information about it. Amelia says the website was very frustrating and not helpful for “foreign entities”. She thinks the state should do more to facilitate out of state licensing.
She strongly recommends to fill out the paperwork first. You’ll have to pay everything up front ($25 testing fee and $750 for the license). Always keep the number you’re assigned handy. I’ve heard that over and over again so I guess it’s a big deal. She says the clock starts ticking from the date of application; you have 90 days to take the test.
She says the test isn’t hard. They send you four large booklets and an employment poster. The test is very pro-employee; you must know employee rights. The test will try to trick you up a bit but if you understand the philosophy behind it, you’ll do okay. You have to know employment rules, who is underage, how wages are calculated (some math involved), how often you must pay, and how many days you have to supply someone their check after their last day. She says she passed the first time but some people there were taking it for the second or third time -many because they didn’t renew on time so their licenses lapsed. You will get a notice by mail, seven to ten days later telling you whether you passed or failed.
You have the choice of taking the test in Los Angeles or San Francisco. If you’re from out of state, she recommends selecting LA. The reason is that the Secretary of State office is three blocks away, and you can go over there for the rest of the day to finish up other paper work (later). The test is given every Friday at 9 AM. Come early! There’s only so many seats available. If all the seats are taken, you have to come back another day, a problem if you’re from out of state. Do not show up for testing without that letter, otherwise you’ll have to pay an additional $25 fee. Only money orders are accepted so it’s not as though you can write a check on the spot. Speaking of pressure, Amelia was in line with a guy who had to pass. The state was holding his products and he was frantic about getting the goods to his customers. If you’re found operating without a garment registration number, they’ll shut you down till you get one.
Again, Amelia says much of the application information only applied to CA residents so it was confusing. She ended up expediting matters by having her CPA contact the Secretary of State’s office to clear it all up. She had to go through the complete requirements list and indicate what didn’t apply as a foreign entity. Some things that didn’t apply were “must be in good standing with the state of CA”. Rather, she had to be prove she was in good standing with her state of residence -getting a certificate from UT- and had to file this in CA to register as a foreign entity. There’s a separate fee to file for this in California; the online information wasn’t good. There it said eight hundred dollars. She says the actual fee was $100, plus a $25 processing fee. She also had to supply articles of incorporation to prove she was not incorporated in CA.
Other things that didn’t apply was requiring that one have a separate business address and most of the tax issues such as a quarterly filing report and worker’s comp insurance. She did not need a worker’s compensation certificate or public health license. The matter of “policy declaration binder, information page, annual rating endorsement, for payroll is not acceptable” does not apply. Good thing too, it sounds complicated. Lastly, you will have to file an IRS 8821 (pdf) so that the IRS can confirm you’re also in good standing with them. This can be faxed to California to complete your foreign entity registration.
In summary, even if you’re living out of state but you’re using a California contractor, you need a license. Your contractor is required to keep your license information on file. It’s possible that Amelia’s friend was audited because her contractor was audited and they didn’t have a number for her. I’m sure said contractor was levied a fine for failing to have it.
Caveat for in-state residents:
Read the definition of manufacturer and contractor carefully. If you do all your production in-house (separate business location is required) you may be a contractor. The license for a contractor is only $100. A manufacturer is the party who is contracting to have the garments made.
Further complicating matters, if you are sewing for profit, have no employees other than yourself, do all of your own work, and do not contract anything (even including dyeing or embroidery) out, you may not need a license. If you’re selling your own stuff you most likely don’t. If you’re producing it for someone else to sell such as in a private label agreement, you’re technically a contractor and need a license. Your client does too; their contracting with you to produce makes them a manufacturer.