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Bulk Sales Law Amended
On September 14, 2011, Governor Chris Christie signed into law P.L. 2011, c. 124, which amends N.J.S.A.54:50-38, the key section of the bulk sales law. The amendment exempt transfers of certain one- and two-family dwelling units and seasonal rental properties from the law’s requirements, provided that the seller is an individual, estate or trust. The act took effect immediately but applies retroactively to August 1, 2007. What is the bulk sales law, and what effect does it have on real estate transactions?
The “bulk sale” of certain assets is subject to taxation under the Sales and Use Tax Act, N.J.S.A. 54:32B-1 et seq. Accordingly, the statutory scheme imposed a notice requirement in connection with such sales. In 2007 the Legislature enacted P. L. 2007, c.100, §5 (eff. June 28, 2007 and operative Aug. 1, 2007). This section, which has been codified as N.J.S.A. 54:50-38, expands the bulk sale requirements as follows:
Whenever a person shall make a sale, transfer, or assignment in bulk of any part or the whole of the person’s business assets, otherwise than in the ordinary course of business, the purchaser ... shall, at least ten (10) days before taking possession of the subject of the sale ... notify the Director [of the Division of Taxation]. ... Within 10 days of receiving such notice, the Director shall notify the purchaser ... that a possible claim for State taxes exists...
The statute goes on to state that if the purchaser fails to give notice to the State, the amount of unpaid taxes becomes a lien on the proceeds of sale payable to the seller. Furthermore, the purchaser shall be personally liable for the payment of the taxes due to the State. See also N.J.S.A. 54:49- 1 (entitled “Tax a debt and a lien...”). The notice requirement is satisfied through the timely submission by the transferee of form C-9600 (“Notification of Sale, Transfer or Assignment in Bulk”) to the Treasury Department. As a practical matter, the “bulk sales” program has become a general tax collection statute, which enables the government, when it is notified of a pending transaction, to collect any taxes which may be due and owing from the seller.
The Treasury Department, Division of Taxation, has published a Technical Bulletin regarding this subject: TB-60 (7-3-08), as amended by TB-60R (10-21-10). Annexed thereto is form TTD (“Asset Transfer Tax Declaration”), which is to be completed by the transferor. Note that form TTD does not replace form C-9600, which must also be submitted. If the Treasury Department is unable to make a timely determination of the amount of tax due (which frequently occurs), it will require that a portion of the proceeds be held in escrow. (The New Jersey Association of Realtors® [“NJAR”] has adopted a “bulk sales addendum” to its standard form of real estate contract, which appoints the purchaser’s attorney or title company as escrow agent.)
Does real estate fall within the scope of the foregoing statute? TB-60R notes that the term business assets includes realty, “...if a use of the realty is to support a business on its premises which includes, but is not limited to, renting space to another”. In any event, it seems that the Treasury Department takes the position that sales of real estate which do not occur “in the ordinary course of business” are subject to the bulk sales rules. Thus, the sale of a warehouse or factory is included within the scope of the law, because the seller’s “ordinary course of business” is the storage or manufacture of goods, rather than the sale of real estate. Similarly, the sale of a multi-family dwelling is included, even if the seller occupies one of the units, because the seller’s “ordinary course of business” consists of the collection of rents, rather than the sale of real estate. On the other hand, the sale of a house by a builder or developer is excluded, because it is part of the developer’s “ordinary course of business” to build and sell homes. For more information, please visit the website of the Division of Taxation: treasury/ taxation.
But even to the extent that real estate transactions fall within the scope of the law, it is clear that the responsibility for compliance lies with the purchaser (or his or her attorney), and not the title company. And in the event of non-compliance, a personal penalty is imposed on the purchaser (rather than a lien on the insured realty).
In general, compliance with tax laws is beyond the scope of coverage afforded by the policy and thus beyond the concern of title companies. There are, of course, exceptions to the rule, such as taxes which (if unpaid) become liens on realty. But, for the reasons discussed above, the bulk sales law does not fall within an exception to the general rule. Accordingly, many title insurers (including the FNTG family) believe it is both inappropriate and unnecessary to insert a requirement or exception in a commitment or policy regarding compliance with the same. Nevertheless, insertion of an informational note in the commitment regarding bulk sales procedures may be appropriate. In sum, the law can be a trap for the unwary, and the parties to a transaction which is or may be subject to its provisions would be well-served to comply with same.
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