What did your accountant say? Did you check with someone in your city's chamber of commerce, or with the city's business department? They'll have answers for you.
You can also buy an inexpensive kit for starting a business in California, or talk to a SCORE representative. (www.score.org
Do you need a city license: it depends. Some cities require it; others don't. For example, Aptos (central coast) is an unincorporated area - so businesses in Capitola need to get a license from the city of Capitola, while businesses in Aptos (the city next door) don't need one. It all depends on your physical address.
Do you need a state license: no, you don't - at least not as of 2003.