Recently, this past December, the New Jersey Division of Taxation posted expanded Frequently Asked Questions and responses regarding the Bulk Sales Act, NJSA 54:50-38. Given the breadth of the Act, which was expanded a couple of years ago to cover transactions in which any seller makes a bulk sale, not just sellers who collect and remit sales tax, a review of these new FAQs is advisable.
Our previous post on the Bulk Sales Act outlined some of its operative provisions. Additionally, for a detailed analysis of the Act, see the article in the New Jersey Law Journal authored by Peter Ulrich and Russell Bershad, “Broad View of the Expansion of the Tax Bulk Sales Notification Requirements.”
When in Doubt, File
The expanded FAQs and responses don’t carry the weight of law but they are interesting and in some cases surprising. They reflect the position that the Division will be taking on many bulk sales issues. The message running throughout is clear: when in doubt, file.
Indeed, that’s precisely the response to Question 22:
22. Q: Suppose the purchaser is unsure if the bulk sale statute applies to her transaction? What should she do?
A: When in doubt, file a completed bulk sale C-9600 form notice in a timely manner. This does not automatically mean that the Division will treat the transfer as falling within the bulk sale law, but it guarantees that the purchaser will not incur any tax liability of the seller for failure to comply with the notice provisions of the law.
The expanded FAQs and responses address many issues including some relating to process and many related to substance. On the process side, of particular note is the Division’s position that the Division has ten business days to reply to a bulk sale notice notwithstanding that the statute says that a reply must be forthcoming in ten days (see FAQ 13 and response). The extension in the reply period afforded by counting business days can be important in deals where, for example, the contract has provisions tied to the timeliness of the Division’s response to a bulk sales notice.
Deed in Lieu
In our last post on the Bulk Sales Act, we noted that in the normal course, there will be little question about whether or not a given transaction is covered by the Bulk Sales Act, and how much consideration is being paid for the transfer.
However, a conveyance by deed in lieu of foreclosure is not a typical real estate transaction between a willing seller and buyer paying a fair market price for the property in question. Therefore, the question arises: does the Bulk Sales Act apply when a borrower conveys title to realty to a lender by deed in lieu of foreclosure? We cautioned against relying on instinct suggesting not.
The expanded FAQs and responses directly address foreclosures and deeds in lieu.
54. Q: Is a foreclosure considered a bulk sale?
A: In a formal foreclosure process, a sheriff’s deed is used to transfer assets to a transferee free and clear without encumbrances. However, a deed in lieu of foreclosure is a conveyance from the actual title owner to the mortgagee, and thus, if the property is or has been used for income producing purposes, it is considered a bulk sale transfer requiring proper and timely notice to the Division from the mortgagee.
In our prior post, we asked the question:
If the Division of Taxation requires the transferee/lender to hold money in escrow to cover the transferor/borrower’s tax liability, including by way of example past due taxes, where will money come from to be held in escrow?
Again, the expanded FAQs and responses are somewhat informative:
30. Q: What if there are no proceeds from the sale or the proceeds are insufficient to meet the escrow amount required by the Division?
A: The bulk sale statute cannot protect a purchaser if he fails to follow procedures prescribed by the bulk sale section. However, the Division will determine escrow amounts to be held based on all the facts as presented by the parties.
Ordinary Course of Business
The Bulk Sales Act does not apply to transactions in the ordinary course of business. Many have asked what that means, and some have argued that if you are in the real estate business, all your transactions, or at least all sales, are in the ordinary course of business.
The expanded FAQs and responses attempt to address this issue:
4. Q: What is considered “in the ordinary course of business?”
A: It is a term whose exact meaning is determined by the type of business being conducted.
Three examples follow including one that provides that a developer who builds houses to sell on a regular day-to-day basis is not making a transfer subject to the statute if the developer sells a house it built.
A second example is the sale of pizza ovens by a pizzeria, which would fall under the statute because sale of food and beverages is the ordinary course of business, not selling appliances.
The third example is sale of a single residence that is rented, also deemed to be subject to the statute because the business is collecting rent, not selling the dwelling.
If there is a theme, perhaps it is that the “ordinary course” is the primary purpose of the endeavor.
Undoubtedly, there are many instances when “ordinary course” will be difficult to define. There will be cases where an endeavor pursues several different activities in the ordinary course, and there is no one, primary purpose.
Using the Division’s example of rental real estate, would the ordinary course exception apply if the property owner frequently bought and sold rental real estate?
The Division addresses this-possibly-in the following FAQ and response:
56. Q. Is a seller/title owner who buys for investment purposes and rehabilitates property not for rent and then sells it, selling in the ordinary course of business and thus subject to the bulk sales law?
A. If it is in the seller’s ordinary course of business to buy, rehabilitate and then sell properties (i.e. this is an activity that the seller does on a regular, as opposed to irregular, infrequent basis), then, generally speaking, these sales would not be subject to the reporting requirements of the bulk sales law. However, if in doubt, the buyer should file the C-9600 to obtain the protection against the potential of being liable for the seller’s tax liability.
So, if the seller derives no rental income, the statute should not apply (but what is meant by “generally speaking”?), but what if, in fact, the premises is rented for a period of time? Is the situation governed by the seller’s intent, i.e., if the property was bought to be rehabilitated and sold, and not to be rented, the statute does not apply although some rent was paid?
Intent can be tough to gauge and prove, but other responses to the FAQs suggest that it may be determinative. For example, the response to FAQ 51 states that “a title owner who is not ordinarily in the business of building new construction or selling real estate, may build new construction with the original intent of leasing it, which she does for six months. At the end of the six month lease, she decides to sell the property. She is not selling it in the ordinary course of business”.
The FAQs and responses cover lots of ground, include some surprises and provide plenty to consider going forward.
Russell B. Bershad is a Director in the Gibbons Real Property & Environmental Department.