New Jersey Bulk Sale Act – Introduction
The New Jersey Bulk Sale Act (N.J.S. 54:50-38) (the “Bulk Sale Act”) applies to many types of transactions and can expose purchasers, transferees and assignees (each a “Purchaser”) to all of a seller’s State tax liabilities.
Before entering into a transaction, make sure you understand the scope of the New Jersey Jersey Bulk Sale Act and its notification and other requirements. If the Bulk Sale Act applies to a transaction, not complying with the Bulk Sale Act and its requirements will result in a Purchaser becoming liable for all of the seller’s, transferor’s or assignor’s State tax liabilities.
What is a “Bulk Sale” under the New Jersey Bulk Sale Act?
In a FAQ document, the State of New Jersey’s Division of Taxation defines a bulk sale as “the sale (or transfer or assignment) of an individual’s or company’s business asset/s, in whole or in part, outside of the ordinary course of business”. Business assets can include real property, personal property and intangible assets, such as goodwill.
Even stock or other equity interests in companies can be considered business assets depending on the facts and circumstances of a transaction. There are exceptions to the Bulk Sale Act, but they are narrow and outside the scope of this brief overview.
How Does a Purchaser Report a Bulk Sale under the New Jersey Bulk Sale Act?
The purchaser of business assets must notify the State at least 10 business days in advance of the transaction by filing Form C9600 (check the State’s website for the current version). This will allow an escrow to be established if the seller has potential tax obligations. In order to be compliant, Form C9600 must be completed correctly and in full, and be submitted along with an executed purchase agreement.
Thus, transactions that “sign and close” on the same day would not be compliant as they would not fulfill the advance notice requirements of the Bulk Sale Act. If a Purchaser fails to adhere to these or other Bulk Sale Act requirements, the State can declare a violation which will subject the Purchaser to all of the seller’s State tax liabilities.
What Happens after a Purchaser Reports a Bulk Sale?
The State has 10 days to respond to a Purchaser’s filing, which period starts from the date it receives all required information. The State typically responds with an Escrow Letter that requires that the Purchaser (or its attorney) establish an escrow and withhold a certain dollar amount from the purchase price at the time of sale pending further instruction from the State. Although unusual, it is possible that the escrow requested exceeds the consideration involved in the transaction.
In other circumstances, the State will inform a Purchaser that there is missing information or that returns are required to be filed and taxes paid to obtain clearance. Or, the State can provide a clearance letter informing the Purchaser that it can proceed with the transaction without an escrow or assumption of the seller’s State tax obligations.
Once an escrow is established, the Purchaser will receive further communication from the State as to whether the funds being held can be released to the seller or should be sent to the State.
Do Purchasers Always Comply with the New Jersey Bulk Sale Act?
In certain cases, a Purchaser will choose not to comply with the Bulk Sale Act due to timing or other issues. In these circumstances, a Purchaser will often have worked with its accountant and tax advisors to conduct due diligence on a seller’s State tax liabilities. In addition, in these situations, a Purchaser will typically require the seller to provide it with uncapped indemnities for State tax liabilities in the purchase agreement.
These mechanisms attempt to reduce a Purchaser’s downside risk for not complying with the Bulk Sale Act. They do not, however, change the fact that non-compliance with the New Jersey Bulk Sale Act will result in the Purchaser assuming the seller’s State tax liabilities, even if such liabilities are greater than the consideration involved in the transaction.
Transaction Planning, the New Jersey Bulk Sale Act and State Tax Liabilities
Both purchasers and sellers in transactions should work with their legal and tax advisors to determine if a transaction is subject to the New Jersey Bulk Sale Act. If the transaction is subject to the Bulk Sale Act, the parties will need to address complying with the Bulk Sale Act in their purchase agreement or otherwise provide for contractual provisions to protect a purchaser from its exposure to a seller’s State tax liabilities.
Copyright 2017, Geoffrey G. Gussis, Esq. All rights reserved. Learn more about me, the legal services I provide, and other articles I have written. Contact: firstname.lastname@example.org or (732) 898-0549. Licensed to practice in New Jersey and New York. Chat with Me.