New Jersey Tax Bulk Sales Guidance Issued
By Robert Daleo, Esq., Guest Contributor
The New Jersey Division of Taxation recently issued guidance in the form of “Frequently Asked Questions” in connection with requirements of purchasers, transferees and assignees (hereafter collectively referred to as “Purchasers”) under New Jersey’s bulk sales law. The guidance takes on added significance due to changes to the bulk sales law several years ago which significantly expanded the transactions that are subject to the bulk sales law and the liability of Purchasers that fail to comply with its requirements. The current bulk sales law, N.J.S.A. 54:50-38, applies to any sale, transfer or assignment (hereafter collectively referred to as a “Sale”) in bulk of any part or all of a person’s “business assets,” other than in the ordinary course of business of such person (i.e., the bulk sales law would not apply to Sales of assets considered inventory).  If a Sale is subject to the bulk sales law, the Purchaser is required to notify the Division of the proposed Sale and, among other things, the price, terms and conditions thereof by filing Form C-9600. The Division must be in receipt of such notice at least 10 days prior to Purchaser taking possession of or paying for the Sale assets. It is important to note that the Division has taken the position that 10 days for this purpose means “10 business days” (i.e., excluding weekends and holidays). The notice must be delivered by registered mail or such other method as the Division may prescribe (currently certified mail, overnight mail, Federal Express or UPS). Note that hand delivery, e-mail and fax are not permitted forms of delivery.
Within 10 business days of receiving a Purchaser’s bulk sale notice, the Division will notify the Purchaser of any possible claim for New Jersey taxes (i.e., all taxes payable to or collectible by the Division and all interest, penalties and additions thereon) and the amount of such claim. If the Division receives a complete and timely bulk sale notice from the Purchaser and fails to provide timely notice to the Purchaser that a possible claim for New Jersey taxes exists, the Purchaser will be deemed to have complied with the bulk sales law and will have no liability imposed pursuant to the bulk sales law.
However, if the Division provides timely notice to the Purchaser that there is a possible claim for New Jersey taxes, the Purchaser may not transfer to the seller, transferor or assignor (hereafter collectively referred to as a “Seller”) an amount of the purchase price or other consideration equal to the amount set forth in such notice. The Division typically requires the Purchaser to escrow such amount at the closing of the Sale. If the Division requests an escrow, the Purchaser must comply with the Division’s instructions regarding release of funds from such escrow and may not otherwise release any funds from the escrow until the Division issues a “clearance letter” to the Purchaser authorizing release.
A Purchaser’s failure to comply with the bulk sales law, including failure to provide the required bulk sale notice or complying with the Division’s escrow demands, results in the Purchaser being jointly and severally liable with the Seller for all of the Seller’s New Jersey taxes (and interest, penalties and additions thereon). It is important to note that such liability is not limited to the purchase price or other consideration paid for the assets that are the subject of the Sale.
The Division has aggressively administered the bulk sales law. For instance, it is the Division’s position that a sale of a single family residence that was leased by the Seller would be subject to the bulk sales law, requiring the purchaser to provide the Division with a bulk sale notice and to otherwise comply with the bulk sales law, even if the Purchaser has no knowledge that the residence was leased.
Due to the severe sanctions imposed on Purchasers failing to comply with the bulk sales law, it is critical to determine whether transactions are subject to the bulk sales law and, if so, for the Purchaser to provide a complete and timely bulk sale notice to the Division and otherwise comply fully with the bulk sales law or make sure that Purchaser is fully protected on these issues through due diligence and an appropriate Seller indemnity.
Some important observations concerning the Division’s administration of the bulk sales law and traps for the unwary that can be gleaned from the recent guidance issued by the Division include the following:
- The Division’s interpretation of the term “business assets” used in the bulk sales law is very broad, thereby expanding the transactions that it views are subject to the bulk sales law. The Division interprets “business assets” to include any assets used in any endeavor from which revenue or consideration is realized for the purpose of generating a profit or loss. This would include both tangible and intangible assets. As noted above, the Division views all leased real estate (even single family residences) to be business assets.
- The Sale of all of a Seller’s business assets is not required for the bulk sales law to apply. The Division indicates that partial sales are covered by the bulk sales law. The Division did not clarify at what point a sale of business assets would be too insignificant to be subject to the bulk sales law.
- The Division had indicated that a Purchaser must fully complete Form C-9600 and attach a binding executed contract of sale or other applicable transfer agreement showing the consideration for and all other terms and conditions of the transfer. It is the Division’s position that if any required information is not accurate or if all required information and documentation is not received by the Division at least 10 business days prior to paying for or taking possession of the Sale assets, the bulk sale notice submitted by the Purchaser will be incomplete and invalid, resulting in Purchaser being liable for Seller’s New Jersey taxes as described above.
Note that the Division’s position regarding submission of a binding contract at least 10 business days prior to a closing effectively eliminates a Purchaser’s ability to comply with the bulk sales law in situations where the sale or transfer agreement is signed on the date of or just prior to closing.
- The bulk sale notice must be filed by the Purchaser or it is not effective.
- While the Division must receive the bulk sale notice at least 10 business days (per the Division) prior to a Purchaser paying for or taking possession of the Sale assets, the Division is required to merely notify the Purchaser within 10 business days that a possible claim exists for New Jersey taxes and the amount of such claim. There is no guidance that provides that the Purchaser must receive such notice from the Division. It is currently the Division’s policy to mail such notices. However, the Division has indicated that it will fax the notice at the Purchaser’s request. Therefore, if a Purchaser has not received the Division’s escrow notice, the Purchaser should not close after the passing of 10 business days from the Division’s receipt of the bulk sale notice without first contacting the Division to determine if it has mailed such notice, and, if so, obtaining a copy of the same.
- The Purchaser or its agent must hold all amounts required to be escrowed by the Division. The Seller or its agent may not have any right to hold or control such amounts.
- The Division has indicated that it is possible for the amount of the required escrow to exceed the purchase price or that an escrow may be required in situations where there are no sale proceeds (e.g., short sales or deed in lieu transfers). However, the Division does note that it will determine escrow amounts based on all facts presented.
- The Division has indicated that a bulk sale notice will be incomplete if the Division is unable to identify a Seller entity. Therefore, Purchasers should confirm that entity Sellers are registered with the Division prior to filing a bulk sale notice.
- The Division has indicated that residential real estate that is leased or otherwise used in a business is subject to the bulk sales law even if:
· The property is leased to friends and family;
· The property is only rented while the Seller is on an extended vacation;
· The Purchaser does not know that the property was leased or used in a business by the Seller (the Division’s position would not change even if the Purchaser received an affidavit from the Seller or the Seller makes a representation in the purchase agreement in this regard); or
· Only a portion of the property is leased or used in a business (e.g., a Seller expenses a portion of the residence as a home office or makes sales of merchandise from the home).
- Short sales and deed in lieu transfers are subject to the bulk sales law.
In summary, recent amendments to the bulk sales law which expand the scope of the transfers subject to the bulk sales law and the liability of Purchasers for failure to comply with the bulk sales law, in combination with the Division’s guidance regarding its administration, require Purchasers to take steps to determine if a transaction is subject to the bulk sales law and, if so, to carefully comply with such law or insure that other contractual protections are in place.
(1) Prior to August, 2007, the bulk sales law applied only to Sales by a seller, transferor or assignor required to collect New Jersey sales tax. As such, the transactions subject to the prior bulk sales law were much more limited than under current law. For instance, many sales of real estate were not subject to the prior bulk sales law since in many instances sellers, transferors and assignors of real estate are not required to collect New Jersey sales tax.
(2) Prior to August, 2007, a Purchaser’s liability for failure to comply with the bulk sales law was limited to a Seller’s New Jersey sales and use tax. As such, the potential liability of a Purchaser for failure to comply with the current bulk sales law has significantly increased.
This article was written by Robert Daleo, Esq., of Riker, Danzig, Scherer, Hyland & Perretti LLP, who heads the Firm’s State Tax and Tax Controversy Practice Groups. If you have any questions about this article please feel free to reach out to Robert at your convenience.