Recently, I took a call from a prospective client who wanted to know why the State of New Jersey sent him a six-figure tax bill for tax years that pre-dated his purchase of a business. He had formed a new entity so as not to take on the liabilities of the seller and had purchased assets only.
The notice letter from the state confirmed my hunch; the buyer had failed to file a bulk sale notice with the New Jersey Division of Taxation.
New Jersey is one of a number of states that have bulk sale laws. The precise features of these laws vary from state to state, but they are all designed to prevent sellers of businesses and business assets from escaping liability for taxes. In most states, they capture sales and use taxes; some states cast a wider net. For example, the New Jersey Bulk Sale Act imposes successor liability for all taxes for which a seller was obligated. New York’s law would impose liability on a buyer for all taxes that a seller was required to collect, even if the buyer does not do business in New York.
A common feature of bulk sale laws is the requirement to file a notice of a sale with the taxing authority of the state or states in which the seller has a connection sufficient to require the seller to collect and/or pay taxes to that state. The taxing authority typically has a small window, sometimes as short as ten days, in which to respond and impose conditions on the closing, typically a requirement that the buyer escrow a portion of the purchase price sufficient to discharge the seller’s tax liability. If the taxing authority fails to respond within the allowable time frame, the buyer will not be liable for the seller’s tax liability.
The New Jersey law requires the buyer to file the bulk sale notice; other states impose the filing requirement on the seller.
Every purchaser of a business or of business assets should be aware of the potential for successor liability for taxes, as should every attorney who handles those types of transactions. Don’t let your acquisition be a banana peel.