Craig Finger
New Jersey’s Sales and Use Tax Act, N.J.S.A. 54:32B-1 et seq., subjects the bulk sale of certain assets to taxation. Since only sellers who were obligated to collect and remit sales tax were required to comply with this Act and prepare the so-called “bulk sales notice,” this Act historically was not applicable to most property sale transactions.
However, Governor Corzine signed N.J.S.A. 54:50-38 into law on June 28, 2007, significantly expanding the reach of New Jersey’s bulk sale statute to any transaction in which a seller makes a bulk sale, transfer or assignment. The new statute was effective August 1. The New Jersey Division of Taxation issued Technical Bulletin TB-60 (Bulletin TB-60) on July 3, 2008, explaining the requirements of the new statute. Bulletin TB-60 (available on the New Jersey Division of Taxation’s web site) contains a good overview of the requirements of the new statute and should be reviewed carefully by commercial real estate practitioners.
Bulletin TB-60 defines “bulk sale, transfer or assignment” as “any sale, transfer or assignment, in whole or part, of a person’s business assets, not made in the ordinary course of business” and defines “business” as any “endeavor from which revenue or consideration is realized for the purpose of generating a profit or loss.” The term “business assets, tangible or intangible” includes, but not is not limited to, “goodwill, materials, supplies, licenses, patents, copyrights, equipment, leases, merchandise or other inventory and realty if the primary use of the realty is to support a business on its premises.” (emphasis added).
The new statute has greatly broadened the scope of the tax bulk sales notice and it is now applicable to transactions in which any seller makes a bulk sale. Since most commercial real estate is owned by a single purpose entity in the form of a limited liability company or limited partnership, the new statute will apply to most sellers of commercial real estate. A purchaser of commercial real estate who fails to follow the requirements of the tax bulk sales notice is personally liable for payment to the State of New Jersey of any taxes determined to be due to the state by the seller. Additionally, the amount of the unpaid taxes becomes a lien on the proceeds payable to the seller.
In order to comply with the new statute, there are a number of requirements that must be met:
• The seller must prepare and deliver to the purchaser the Asset Transfer Tax Declaration (Form TTD), which directs the seller to enter the information needed (such as the purchase price, settlement charges, non-depreciated cost, net operating loss and/or current year loss, gain, amount of any gain deferred (if applicable), current year gain and applicable tax rate) to estimate the income generated by the sale and the estimated tax due on the gain.
• The purchaser must then prepare a Notification of Sale, Transfer or Assignment in Bulk (Form C-9600) to notify the Director of the Division of Taxation (Director) of any bulk transfer.
• The purchaser then submits Form C-9600 and Form TTD, together with the fully executed purchase and sale agreement, to the Director. These documents should be submitted at least 10 days prior to the date of closing.
• Within 10 days following receipt of the documents, the Director will notify the purchaser of any possible claim for state taxes owed by the seller and specify the amount to be escrowed by the purchaser at the time of closing. It is preferable for the purchaser’s attorney to act as escrow agent. The escrow amount will include all deficiencies, interest, penalties, etc.
• If no taxes are owed, the Director will issue a letter of clearance. After closing, any amounts owed will be paid out of the escrow account.
• After all final returns have been filed by the seller and all state taxes are paid, the Director will authorize the release of any funds remaining in the escrow account by issuance a letter of clearance.
• Upon receipt of the letter of clearance, the purchaser is relieved of any further liability.
To ensure compliance with the new law, purchasers should consider including these provisions in the purchase and sale agreement:
1) A requirement that both the purchaser and the seller are required to fully comply with N.J.S.A. 54:50-38;
2) A provision granting the purchaser the right to file the requisite notices with the State of New Jersey Division of Taxation at least 10 days prior to the date of closing;
3) A provision requiring that a portion of the sales proceeds are to be held in escrow with the purchaser’s attorney to cover the amount of any possible tax claim and authorizing disbursements from escrow account to pay amounts directed by the Director; and
4) A provision requiring the seller to indemnify the purchaser for any state tax liability.
— Craig Finger is a partner with Fox Rothschild in the Real Estate practice group.