Navigating Colorado’s Cottage Foods Act and Starting a Home‐Based Food Business



Ashley Colpaart and Martha Sullins1

Overview In March 2012, the Colorado Legislature enacted Senate Bill 12‐048 allowing individuals to produce, process, package, sell, and store limited types of non‐ potentially hazardous food products, from an unlicensed home kitchen. This act was subsequently amended in April 2013 by House Bill 13‐1158 to clarify several definitions in the original bill. Cottage food businesses require no license or permit from the Colorado Department of Public Health and Environment or other entity and are not inspected by any state or local government agency. Food products must be produced, processed or packaged in a home kitchen, and may only be sold directly by the cottage foods operator to the end consumer. Net sales for each product produced must not exceed $5,000 annually. Sales by consignment or to retail food or wholesale food establishments are prohibited. Starting a cottage food business can be one avenue for testing your production and marketing plans, prior to developing a small‐scale commercial food business. It may also allow some home‐based producers to earn additional income from selling a limited array of products without using commercial processing facilities. However, it is still a business to produce and promote your product(s), which means you need to manage your risks and returns as a business owner. This guide will help you to:  understand the regulations applicable to cottage food producers;  consider the costs and benefits of doing business under Colorado’s Cottage Foods Act;  identify potential business risks; and  explore some common business development and risk management practices that will put your cottage food business on the road to success.





1 Ashley Colpaart is a Graduate Student in the Department of Food Science and Human Nutrition;

Martha Sullins is a Regional Extension Specialist with Colorado State University Extension. Fact sheet developed with support from the Colorado Department of Agriculture.





Steps to Starting a Cottage Food Business in Colorado It is important to know what is required under Colorado law when starting a small, home‐based business, as well as some considerations that may influence where and how you operate your business. Understand your county and municipal zoning regulations. In Colorado, local governments often retain authority over land use management, and your local planning department may have zoning codes and permitting with which you must comply before opening your home‐based business. These regulations may restrict your ability to operate a business in your residential area; erect a sign advertising your business; or conduct commercial transactions from your home. Therefore, checking with your county and/or city is an important first step since these regulations are so unique to each local government in Colorado. Consult your Homeowner’s Association (HOA). If your residential area is governed by an HOA, this entity may also have specific requirements for home‐ based businesses, or prohibitions against their operation. Form your business by obtaining a trade name. This will help you differentiate your product from others in the marketplace, and retain that distinction. If your business name is different from your own legal name, register with the Colorado Secretary of State (http://www.sos.state.co.us/pubs/business/fileAForm.html). Consider forming a separate legal entity for your cottage food business. If you are operating your cottage food business as a sole proprietorship, you are exposing your personal assets to the possible risks of your food business. By separating your personal and your business assets, you protect your personal assets from any legal claims or action that might be taken against your business. Consult an attorney or tax accountant to discuss options for legal structure and the implications for management, tax liability, ownership, outside investment and dissolution of your food business. Obtain a Federal Employer Identification Number (EIN), if you will be hiring employees. This is obtained through the Internal Revenue Service (https://sa1.www4.irs.gov/modiein/individual/index.jsp), and is important for reporting and paying federal income and employment taxes. Understand your sales tax liability. Although there is no state sales tax on food to be consumed at home, you may be responsible for city or county sales taxes. Again, check with your local tax authority since it is your responsibility to be in compliance with all state and local sales tax laws (verify at https://www.colorado.gov/revenueonline/_/#1).

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Understand your liability exposure. A cottage food business has some unique risks, including the fact that there is no regulation or direct oversight of your home business. Therefore, you must be certain to use the best production practices and home‐grade equipment possible, and stay informed about changes in local, state and federal laws. You should also monitor information about food recalls that could potentially implicate your ingredients and, consequently, your end product. These considerations will be discussed below in more detail.

Understanding Colorado’s Cottage Foods Act

What You May Produce The Cottage Foods Act allows production and sales of a limited range of foods that are non‐potentially hazardous and do not require refrigeration, including: Products allowed under Colorado’s Cottage Foods Act Spices Honey Teas

Jams, jellies, preserves (except jalapenos)

Dehydrated produce

Fruit butters (except pumpkin)

Nuts

Candies (and prepackaged cotton candy)

Seeds (including roasted coffee beans)

Allowed baked goods (including dry cake mixes and granola bars)

Egg sales Note that cottage food producers may also sell 250 dozen or fewer whole eggs per month under the Colorado Cottage Foods Act, provided that they put a label on each carton that contains:  the address at which the eggs were produced;  the date on which the eggs were packaged; and  if the whole eggs are NOT treated for salmonella, the following statement must appear on each carton or package: "Safe Handling Instructions: To prevent illness from bacteria, keep eggs refrigerated, cook eggs until yolks are firm, and cook any foods containing eggs thoroughly. These eggs do not come from a government‐approved source.” The following table provides examples of potentially hazardous food products that are NOT allowed under Colorado’s Cottage Foods Act and, therefore, must be processed in a commercial kitchen:

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Non‐allowed products that require commercial processing in a registered facility Baked goods such as cream, custard or Fresh or dried meat or meat products meringue pies and cakes or pastries with including jerky cream cheese icing or fillings Focaccia‐style breads with vegetables or Fish and shellfish products cheeses Milk and dairy products including hard Raw seed sprouts or soft cheeses and yogurt Canned fruits, vegetables, flavored oils, Cut fresh fruits and vegetables or juices salsas, sauerkraut, etc. made from fresh fruits or vegetables Barbecue sauces, ketchups or mustards, Ice and ice products Canned pickled products (corn relish, Fresh, homemade pasta pickled vegetables and pickles) Low‐sugar jams and jellies; jalapeno Sourdough bread starter pepper jelly; pumpkin butter Refer to the Colorado Department of Public Health and Environment’s web page for updates on allowed and non‐allowed products: http://www.colorado.gov/cs/Satellite/CDPHE‐DEHS/CBON/1251586894464. Lastly, remember that even though a product is described as non‐potentially hazardous, you must still maintain sound sanitation, processing and packaging practices to ensure your product’s safety in the marketplace. Labeling Your Product Cottage food products must be labeled as required by the Cottage Foods Act. Your labels, printed in English, must include:  The identification of the cottage food product;  The producer’s name and the address at which the cottage food was produced;  The producer’s current phone number or email address;  The date on which the food was produced;  A complete list of ingredients; and  The following statement: “This product was produced in a home kitchen that is not subject to state licensure or inspection and that may also process common food allergens such as tree nuts, peanuts, eggs, soy, wheat, milk, fish and crustacean shellfish. This product is not intended for resale. ” As good practice, list your product’s ingredients in descending order by weight and, if your product includes a prepared ingredient (for example chocolate chips), then

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the label should include the sub‐ingredients as well (sugar, chocolate liqueur, cocoa butter, butterfat (milk), soy lecithin as an emulsifier). A growing number of individuals suffer from food allergies, some of which are life‐ threatening. The following foods have been identified by US law as major allergens:  Milk  Eggs  Wheat  Peanuts  Soybeans  Fish (including shellfish, crab, lobster or shrimp)  Tree nuts (like almonds, pecans, or walnut—identify which nut was used) Therefore, if your products contain any of these ingredients, you may also want to state clearly on your label that your products contain that specific allergen. Print your labels in permanent legible ink and in font large enough to read, such as 10‐ point, and in a color that is a clear contrast to the background images or color. Remember, your product label has multiple purposes. It is your truthful representation about the characteristics and quality of the product. It assists the consumer in determining whether the product poses a particular hazard because of allergens or other food‐related issues such as gluten intolerance. Lastly, your label is essential to tracing and recalling the product, should that ever be necessary. Selling Your Product There are limited venues from which you may sell cottage foods‐‐in farmers’ markets, directly to customers from your home or through a CSA or farm stand. You may not sell your cottage food products to local restaurants or grocery stores; rather, you must sell directly to your consumers. Therefore, sales directly to the consumer should not include sales by the internet, mail or phone order, or consignment or wholesale. You also may not resell someone else’s cottage food product. Lastly, your sales are limited to $5,000 in net sales per product, per year. Note, however, a product is defined as one individual recipe such as grape jelly, strawberry jelly, peach jelly and so forth. When contacting farmers’ markets about selling your cottage food products, be understanding of the challenges they face in managing many individual market vendors. Some farmers’ market managers are hesitant to feature cottage food products in their markets, while others will allow such sales with appropriate product liability insurance. Remember that market managers retain the right to exclude any vendor from selling in their market. These considerations are important when developing your marketing plan. Always verify that cottage food sales are permissible from a venue before planning on income from product sales through that outlet. 5



Required Training The Cottage Foods Act requires that all cottage food producers have and maintain some training in safe food handling and processing. There are several options for obtaining this required training:    

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ServSafe® Food Protection Manager Certification ServSafe® online certification from the National Restaurant Association Educational Foundation Your local or district public health agency Colorado State University Extension’s food safety courses (contact your local office for more information: http://www.ext.colostate.edu/cedirectory/countylist.cfm) National Environmental Health Association’s Certified Professional Food Manager

Make sure you receive a certificate confirming your training and documenting your mastery of the subject matter. Each certificate program has a different cost and validity period, so check with each program before signing up, and make sure you remain in good standing after taking any training course.

Managing Risk When Starting and Operating a Cottage Foods Business Some risks can be avoided or minimized with proper business planning. Your first step is to understand the general regulations for doing business in Colorado, and how the Cottage Foods Act fits into those regulations. Then, you can begin to develop a business plan based on these conditions and opportunities. Have a plan. First, develop a plan for your cottage food business. Your plan will provide a roadmap for how you intend to grow and manage your business. Make sure to develop goals with a timeline—based on the product(s), costs incurred for your business, your timeline for generating income from production, and where you plan to sell your products. For more information on developing a business plan for a value‐added business, see Strategic Business Planning Fact Sheet. You don’t need to develop a full‐fledged business plan; however, having goals for your business’s development, a basic marketing plan, and a budget will enable you to be a better manager. You can then use your plan, in conjunction with your recordkeeping system, to review how well you are meeting your goals and income targets, and which aspects of your business plan need to be adjusted. Remember that your plan may need to change because of developments in your markets, your level of experience, the general business environment, or changes to the business’s resource base (such as capital, equipment, and labor). If initial planning

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demonstrates that your business is not financially viable, this provides you with the opportunity to make adjustments before you invest your scarce resources. Develop and use a recordkeeping system. As a business owner, it is important to keep good records of your finances, your ingredients and equipment, and your product inventory and sales. You should also ask for and document customer feedback on the quality of your product(s). Your records are essential for helping you track your business’s costs and earnings. For example, by tracking sales by market outlet (your home, farm stand, or farmers’ market) for each product, you can adjust your inventory or switch to markets that will bring you a greater profit. Second, document all procedures to show you employed the highest standards possible. Keep records of all your production (batches, items). Since cottage food producers are exempt from third party inspection and regulation, you alone are responsible for monitoring and ensuring the safety of your production and food products. Lastly, keep invoices of all purchased ingredients (what you bought, when you bought it, and from whom you bought it), and keep records of the ingredients you grow (date of harvest, location grown). Not only is this important for quality control, but this information will be helpful if one of your ingredients is recalled. If your product label has a batch number and your records include which ingredients you used to make that batch, then you can advise customers of a potential food safety issue and pull any suspect packages from your sales inventory. Resources for monitoring or reporting food recall information include:  http://www.fda.gov/safety/recalls/default.htm  http://apps.usa.gov/product‐recalls‐2.shtml (mobile app)  http://www.fda.gov/ForConsumers/ConsumerUpdates/ucm095859.htm Consider liability insurance. Liability insurance is a good business investment that provides some protection for the cottage food producer and his/her business. First, the Cottage Foods Act does not provide any limits to the producer’s liability for any injuries, illnesses or other harm resulting from a cottage food product. Therefore, as a cottage food producer you will need to do a very critical risk analysis regarding the types of foods you intend to produce, since some foods are inherently more risky than others (for example, a canned jelly is potentially more likely to become contaminated and to support bacterial growth than roasted coffee beans). Second, discussions with insurance agents indicate it is unlikely that your homeowner’s insurance will cover a business liability related to manufacturing a processed product in your home, but be sure to discuss your business plan with your insurance agent to see if you can obtain any additional coverage. Consider, however, that since insurance companies have little to no experience insuring cottage food products, premiums may be high with respect to your anticipated 7





income from product sales. Your risk exposure and the costs of insurance may influence both your product line and your business’s profitability. Invest in good equipment. Use the best home‐grade equipment possible and maintain it in good working condition in order to have a safe manufacturing line, and to provide some protection in case of any product liability action. By documenting that your product and/or process were not defective and that you used the highest possible standards (known as “state of the art”), then you have some ability to demonstrate you were not negligent. Use safe food handling practices in your home. Food products should be produced and stored in your home kitchen or pantry and not in your garage, shed, barn or other outbuilding. The Cottage Foods Act defines a home kitchen as being in the primary residence occupied by the producer. Designate specific locations where you will store your cottage food product ingredients. Label your containers clearly to prevent cross contamination, and track your ingredients’ expiration dates. Store cottage food product ingredients separately from your family’s food ingredients, and monitor all areas for pest issues that could potentially contaminate products. Make sure that you and any employees or individuals involved in preparing, packaging and handling your cottage food product(s) are not ill. Everyone involved in your business should wash their hands before preparing and/or packaging food products, and no one should have bare hand contact with ready‐to‐eat foods (instead use single‐service gloves, bakery papers, tongs or other utensils). For safety and sanitation, infants, small children and pets should not be in your cottage food preparation areas. You can meet high production standards in your own home by focusing on good sanitation and preventing cross‐contamination of surfaces and products. Be sure to clean and sanitize counters, utensils and equipment before and after food production. See http://www.ext.colostate.edu/safefood/home/sanitize.pdf for more information. Lastly, consider the safety of your water supply. If you are on a private water supply system, have your water tested for bacteria and nitrates before making your product(s), and retest it on a regular basis thereafter. Keep these water test results with your business records. Transport products safely to your customers. Whether you are picking up ingredients or taking your finished products to the farmers’ market, your vehicle’s cleanliness is critical to ensuring the safety of your food products. Clean your vehicle on a regular basis, and inspect it for cleanliness, odors and obvious dirt or debris before loading your product. Make sure your food products are properly packaged to prevent damage or contamination. Use only clean cardboard boxes that have not been used for transporting hazardous materials. Do not use your vehicle to transport cottage products if there is a risk of contamination from previously transported items, such as chemicals, pets, allergens or other hazards. Lastly, keep 8





your vehicle’s doors locked when the vehicle is parked to prevent someone else from damaging or contaminating your food product. Conclusion Colorado’s Cottage Foods Act provides some unique new opportunities for home food producers to develop and test new food products for sale to the public, generate limited income streams, and test new marketing strategies and new business models. However, as in developing any business, new opportunities come at some cost, including limited sales outlets and a cap on potential revenues generated, as well as risk exposure that may be difficult to manage due to insurance costs and a lack of legislative protection. Cottage food producers will need to engage in careful planning, document all their processes, and monitor their business practices for safety and financial viability. As small‐scale, unregulated businesses they will lack the business supports of typical commercial‐scale businesses, but they can use the Cottage Foods Act as an opportunity to build a business that can grow into a larger‐scale food business with greater potential for profitability in the marketplace.

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Other Resources 

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Colorado Cottage Foods Act: http://www.leg.state.co.us/clics/clics2012a/csl.nsf/fsbillcont3/F8EA74C84 47BB62387257981007DD1AD?open&file=048_enr.pdf (March 15, 2012) Amendment to Colorado Cottage Foods Act: http://www.leg.state.co.us/clics/clics2013a/csl.nsf/fsbillcont3/94472D259 F284A1B87257AEF005D63F9?open&file=1158_enr.pdf (April 4, 2013) Business information & food safety: www.cofarmtomarket.com

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Colorado State University food safety: www.farmtotable.colostate.edu

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Cottage Foods Product Information Sheets: http://farmtotable.colostate.edu/prepare‐cottage‐foods.php

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Cottage Foods Producer Checklist (pdf form), for use by food producers, farmers’ market managers, and food safety training instructors: http://www.cofarmtomarket.com/downloads/CottageFoodChecklist.pdf Recorded webinar from July 11, 2012 “So You Want to be a Cottage Food Producer”: https://connect.extension.iastate.edu/p9lyogz45vf/ FAQs on cottage food production and business development (including those from the July 11 webinar): http://www.ext.colostate.edu/colofood/FAQs%20July%2011%20webinar.p df

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Cottage Foods Budgeting Example: http://www.cofarmtomarket.com/downloads/CottageFoodBudgetingExamp le.pdf

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