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Buyer Beware: You Could Pay the Seller’s State Taxes!

Posted by Michael S. Selvaggi | Nov 05, 2019 | 0 Comments

The New Jersey Bulk Sale Statute is intended to protect a buyer from inheriting any tax debt when buying a seller's business assets. It applies to any sale (or transfer or assignment) of an individual's or company's business assets. When such a sale is proposed, the Division of Taxation must be notified so it can collect any taxes that might be owed by the seller. Business assets are assets that generate income or loss and include:

Tangible property such as inventory or materials,

Real property (land, buildings etc.), and

Intangible assets, such as goodwill. 

The transfer of real estate that generates income or has a business purpose including vacant land is subject to the law.  It does not apply to property being foreclosed upon although it could apply to property being conveyed by way of a deed in lieu of foreclosure.  Interestingly, if a seller buys, rehabilitates and then sells properties, these sales are not subject to the law nor is the sale of a one-or two-family residence owned by an individual, estate, or trust.

Importantly, the buyer or his attorney must notify the State of the transaction.  The notification is given using the C-9600 form that includes:

  1. The valid New Jersey tax ID numbers for the seller and buyer;
  2. A specific closing date, which must be at least 10 business days after submission;
  3. Proper mailing addresses for both parties and/or their attorneys;
  4. The signatures of the buyer or his attorney;
  5. A copy of the executed contract of sale, court order, or assignment agreement clearly showing the sales price and the terms and conditions of the transfer.

The Division must receive the C-9600 and a copy of the contract at least (10) business days before the closing date.   Delivery can only be made through registered, certified or overnight mail – or through an express package delivery company such as Fed-Ex or UPS.  There is no filing fee.  If a buyer does not send the notice, a violation occurs and the buyer could be responsible for the payment of any State tax resulting from the sale.

Within 10 business days of its receipt, the Division will reply by sending one or more of the following documents:

  1. Escrow Letter – Sent to the buyer with a copy to the seller, stating the amount of money to be held at the time of transfer;
  2. Returns Required Letter – Sent to the seller, outlining which tax returns must be filed and which taxes and fees must be paid to obtain clearance;
  3. Clearance Letter – Sent to the buyer stating the buyer will not assume any obligation of the seller and no escrow is required.
  4. Insufficient Notice – Sent to the buyer, listing items that are missing from the notification and requiring them to be submitted in order to make the notification complete.
  5. Bulk Sale Violation – Sent to the buyer stating that he has assumed the seller's tax obligation for the sale due to a violation

The 10 -day period is critical because there is no way to expedite service or the response from the Division.  To complicate matters, no response can be faxed or emailed.  The Division sends all correspondence via first-class mail.  If the Division misses the 10-day deadline, the buyer will not be liable for any State tax obligation due from the seller.  That is way the buyer must be diligent in recording when the notice is sent and received. 

If the Division requires an escrow it will establish a specific amount that the buyer must withhold from the proceeds of the sale.  The escrow is calculated using data related to existing and prior tax obligations, information from audits, the expected gain from the sale of the assets, and any unfiled returns.  If the money is not held in escrow at closing, the buyer will be liable for the seller's tax obligations if there is a shortfall.

Sometime the parties forget to file the notice until it is too late.  They often then agree to escrow all of the sales proceeds.  However, this is a violation although the State won't likely take action if the correct amount is paid.  

The amount of the required escrow can exceed the purchase price.  Should this occur and there are no proceeds from the transaction to satisfy the Division's required escrow, it is still the buyer's responsibility to hold the required escrow. It will be up to the buyer and seller to decide who will provide the additional funds at closing to satisfy the escrow.  

Following closing the Division finalizes the seller's state tax obligations and issues a clearance letter to the buyer requiring him to pay from the escrow any tax due and allowing the balance to be sent to the seller.

Given the possible consequences that might befall an unsuspecting buyer, it is critical that you retain a competent lawyer if you are interested in buying any business or the assets of any company.  If you do not, you could face unforeseen monetary penalties that will significantly impact the success of your endeavor.  The lawyers at Lavery, Selvaggi, Abromitis and Cohen have been representing buyers and seller is business transactions for years and are very capable of protecting your interests in any such deal.  

About the Author

Michael S. Selvaggi

Managing Partner


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