States are often concerned that sellers of assets, particularly those from out-of-state, will disappear with the sales proceeds without satisfying their state tax obligations. To prevent this, many states require the filing of a bulk sales notice with the taxing authority notifying it of the pending sale. This allows the state to review the seller’s tax account to determine if any outstanding taxes exist.
The taxing authorities are typically allotted a certain number of days to inform the parties of the transaction of any liabilities. Funds from the purchase price are placed in escrow to satisfy the potential tax liabilities and are only released to the seller when all obligations have been paid. These bulk sale rules also serve as protection by preventing transferee liability from being transposed on to the purchaser of the business assets.
In 2007, New Jersey expanded its bulk sales notice requirement from applying only to sales tax obligations to apply to all outstanding taxes. In short, the expanded version of the law allows the New Jersey Division of Taxation (“Division”) time to review the transferor’s entire tax account to determine if there are any tax liabilities which can be recouped at the time of the sale. The Division broadly defines “business assets” to include both tangible and intangible assets such as goodwill, materials and supplies, licenses, patents and copyrights, equipment, merchandise and product inventory. With regard to real estate transactions, the bulk sales law applies to:
- Sales of rental real estate;
- Sales of real estate used in a trade or business;
- Sales of any real estate (other than inventory) owned by a business entity;
- 1031 like-kind exchanges;
- Transactions involving a deed in lieu of foreclosure for income producing properties; and
- Auction sales that are not court-ordered.
Sales of a “simple dwelling house” (1- or 2-family home) by an individual, estate or trust, and sales of real estate inventory by real estate builders or dealers, are however exempt from the bulk sales notification requirement.
In order to forestall an unusually large escrow demand, New Jersey requires a seller to file an Asset Transfer Tax Declaration (Form TTD) estimating the tax due from the gain on the sale of assets. This estimated gain will be remitted to the state from the escrowed funds upon closure of the transaction. In computing the estimated gain, Form TTD takes into account the adjusted basis of the assets sold, any available net operating losses, other losses recognized in the same tax year, and selling costs.
Gathering the information to properly complete the Form TTD can be a cumbersome task. Generally, all of the shareholders, partners or members of a selling entity must each complete a separate Form TTD. However, if the transferring entity does not have individual partners, or if there are more than five individual members, an organization chart can be provided with a single Form TTD for the Division to compute the estimated tax due by each nonresident partner.
The failure to escrow sufficient funds to satisfy a seller’s outstanding tax obligations can result in the purchaser becoming liable for the outstanding tax debts. New Jersey does not impose a financial penalty for failing to comply with its bulk sales rules, but the uncapped transferee liability on all state taxes is enough of a deterrent on the purchaser to ensure compliance.
Although New Jersey’s bulk sales rules have been on the books for some time, purchasers must remain cognizant of the protections afforded by complying with the law. A purchaser’s due diligence becomes all the more important as potential transferee liability exposure extends to the various state and local taxes. If you require assistance with respect to a bulk sale of assets, please contact Alan Goldenberg, Senior Manager of State and Local Taxation and Tax Controversy, at firstname.lastname@example.org or 212-897-6421, or your Friedman LLP tax professional.