selling wedding cakes, setting up small business in WA state, collecting taxes and possible liabilities under WA law

Whether you want to be a business or claim to be one is irrelevant. You have a business because you are getting money from services you provide to the public. The definition of "business" by the government is very broad.

You likely need licenses and permits from the State of WA, King County, and several cities. You likely will need to file state and local tax returns quarterly and annually. If you have low revenues, you likely will not have to pay state and local taxes. However, the returns will still need to be filed. You may still have to pay use tax or collect sales tax.

For federal income tax, you do need to report your income. See Publication 17 from the IRS at www.irs.gov . The publication will refer you to other publications that has more detailed information.

The WA Department of Licensing has a program that helps a business starter to find out what permits and licenses the starter will be needing. That website is: http://www.dol.wa.gov/business/startbusiness.html .

From Auburn's website: "(Pursuant to Ordinance No. 5754) All persons operating a business, occupation, trade, or profession located within the city limits, or operating from a post office box in the city of Auburn, must obtain a City of Auburn general business license. Additionally, any business within the city jurisdiction working on any project requiring a permit must also have a City of Auburn business license. Government agencies are not required to be licensed." Auburn's business page is here: http://www.ci.auburn.wa.us/planning_community/permit_center/index.asp .

Many cities in WA require that a business that does business in those cities must apply for business licenses in those cities even though the business has no physical office in those cities. So, for example, if you are driving your cakes into Seattle, you likely need a Seattle business license.

Since you are producing food, you likely need clearance from the health departments.

Anytime a business works with the public, it may be prudent to obtain appropriate insurance coverage. Things that can go wrong seem to always find several ways to go wrong.

Running a business involves a lot of paperwork. If you do not timely file the correct paperwork, the agencies can fine you.

You may want to review your facts and options with an attorney.

I can not answer the question about Washington law with respect to licenses or permits for a food related business. However, for tax purposes, any profit you make from selling cakes should be reported as income on your income tax return.