In my last article on taxes, I did not address the issue of bulk sales. Very few non-lawyers or non-accountants are familiar with this tax law, but as a business buyer or seller, you should be aware of it.
State bulk sales laws are designed to prevent the transfer of business assets in bulk outside the normal course of business without certain procedures being complied with. The law is designed to prevent a dishonest business seller from transferring his tax liability to a buyer of the business, and it is also designed to aid the State’s tax collection process. If, for example, a car dealer sells a car to a customer in the normal course of business, the bulk sales law would not apply. If, however, he sells his entire inventory to another dealer, the bulk sales statute would apply i.e. he is selling his entire inventory in bulk.
In New Jersey, if a business owner owes the State back taxes, a lien attaches to those assets. If those assets are sold without compliance with the bulk sales statute, the buyer of those assets becomes liable for the taxes, i.e. the lien attaches to those assets, and transfers with those assets. In New Jersey, in order to be in compliance with the Bulk Sales Statute, prior to closing, a form is filed with the New Jersey Division of Taxation, Bulk Sales Unit, along with an executed copy of the contract of purchase and sale. After review of the documents, the bulk sales unit will issue a letter indicating that the bulk sales statute has been complied with; the letter will also stipulate that a certain amount of money should be withheld from the Seller at closing. These funds are generally held in an attorneys escrow account, and will be held until the former owner of the business files all of his or her final tax returns, and pays any and all liabilities in full. Subsequent to the seller of the business filing all tax returns and full payment, the funds held in escrow will be released to the seller.
So if you are thinking about buying a business on a “handshake”, remember that if the seller is not in compliance with the State tax law, you will become liable for his or her back taxes. If you do not pay, the State can seize the assets that you paid the seller for.