Does/can anyone who is not licensed file taxes? Even though you may sell as a hobby to other people who are not friends & relatives. If you can file taxes, what deductions can you have/make?

If you are reporting it as income on your taxes, then I would think you should be collecting sales tax and turning that in also through out the year. If you are collecting sales tax, then you need to have a sales tax license. Best advice is to check with your accountant.

If you're selling as a hobby, there is a place on the 1040 for "hobby income." The ONLY deductions you can take for hobby income are expenses you incurred from conducting that hobby. Also, your expenses cannot exceed your income; ie. if you spent more throughout the year on cake supplies than you made for the whole year on orders (which isn't good business but would probably happen with a hobby), you cannot deduct those extra expenses from your regular income. It's a good idea to report your hobby income--especially if you're paid with a check or credit card. Be sure to keep all your receipts to show for your expenses!

If you sell for profit it is not a hobby it is a business and must be done on a schedule C for your business.

Here is an IRS link.
http://www.irs.gov/businesses/small/article/0,,id=99239,00.html