The opinion of the court was delivered by: Small
In this case the court holds that a person acquiring assets by way of a deed in lieu of foreclosure and a bill of sale who fails to give notice to the Director of the Division of Taxation under N.J.S.A. 54:32B-22(c) is liable for the sales and use tax liability of the person from whom the assets are acquired.
The plaintiff, New Jersey Hotel Holdings, Inc., challenges assessments by defendant, Director, Division of Taxation, for Sales and Use Tax (N.J.S.A. 54:32B-1 to -29) in the total amount of $56,787.97. *fn1 The matter has been submitted to the court on stipulated facts. R. 8:8-1(b). The parties have each moved for judgment on those facts.
The amount of the tax liability is not in issue. Nor does the plaintiff dispute the liability of the prior owners of the real and personal assets which it acquired on August 3, 1990, for the sales and use tax assessments. The sole issue for determination by this court is whether the Director may make an assessment against plaintiff under N.J.S.A. 54:32B-22(c) for the sales and use tax liabilities of the entities from which it acquired the assets by way of deeds in lieu of foreclosure and bills of sale.
On January 16, 1987, County Savings Bank made loans to several entities secured by three mortgages, assignments of rents, and security agreements on three hotels in New Jersey. In January and February 1988 the underlying properties were transferred to three separate partnerships; the mortgages, assignments of rents, and security agreements were modified, and the new owners assumed all of the liabilities of the original owners. In February 1989 the new owners defaulted on their obligation to County Savings Bank. County Savings Bank initiated foreclosure proceedings. In the foreclosure proceedings the Attorney General of the State of New Jersey received notice and did not answer or appear.
The foreclosure proceedings were settled by an agreement which provided that on default of that agreement County Savings Bank or an affiliate would take the three hotel properties by way of deeds in lieu of foreclosure. On August 3, 1990, pursuant to that agreement on default of the owners of the hotel properties, New Jersey Hotel Holdings, an affiliate of County Savings Bank and the plaintiff in this action, acquired all of the hotel assets - the real property by way of deeds in lieu of foreclosure and the personal property by way of bills of sale.
The mortgages, security agreements, and assignments of rents by which plaintiff first acquired an interest in the hotel properties and eventually took those properties, were filed in January 1987. The sales and use tax liabilities, which are the basis of the Director's assessments, arose after the date of those agreements and before August 3, 1990. Plaintiff did not give advance notice to the Director of the Division of Taxation about the August 3, 1990 transfer.
N.J.S.A. 54:32B-22(c) provides:
Whenever a person required to collect tax shall make a sale, transfer, or assignment in bulk of any part or the whole of his business assets, otherwise than in the ordinary course of business, the purchaser, transferee or assignee shall at least 10 days before taking possession of the subject of said sale, transfer or assignment, or paying therefor, notify the director by registered mail of the proposed sale and of the price, terms and conditions thereof whether or not the seller, transferrer or assignor, has represented to, or informed the purchaser, transferee or assignee that he owes any tax pursuant to this act, and whether or not the purchaser, transferee, or assignee has knowledge that such taxes are owning, and whether any such taxes are in fact owing.
Whenever the purchaser, transferee or assignee shall fail to give notice to the director as required by the preceding paragraph, or whenever the director shall inform the purchaser, transferee or assignee that a possible claim for such tax or taxes exists, any sums of money, property or choses in action, or other consideration, which the purchaser, transferee or assignee is required to transfer over to the seller, transferrer or assignor shall be subject to a first priority right and lien for any such taxes theretofore or thereafter determined to be due from the seller, transferrer or assignor to the State, and the purchaser, transferee or assignee is forbidden to transfer to the seller, transferrer or assignor any such sums of money, property or choses in action to the extent of the amount of the State's claim. For failure to comply with the provisions of this section the purchaser, transferee or assignee, in addition to being subject to the liabilities and remedies imposed under the provisions of the uniform commercial code, Title 12A of the Revised Statutes of New Jersey, shall be personally liable for the payment to the State of any such taxes theretofore or thereafter determined to be due to the State from the seller, transferrer or assignor, and such liability may be assessed and enforced in the same manner as the liability for tax under this act.
[N.J.S.A. 54:32B-22(c)(emphasis added).]
This statute has been construed once in a reported decision of this court. Bunting v. Director, 1 N.J. Tax 189, 176 N.J. Super. 262 (Tax 1980) (holding that failure to give notice of a transfer under N.J.S.A. 54:32B-22(c) subjects a purchaser to the seller's sales tax liability.)
The mechanics of the statute are described in Bunting, (supra) . Ten days before a sale, transfer, or assignment in bulk of business assets other than in the ordinary course of business, a purchaser, transferee, or assignee must notify the Director of the Division of Taxation. On receipt of the notice the Director informs the purchaser how much of the consideration to escrow with regard to the seller's sales tax liability. Following this procedure, the purchaser can effectively limit its liability to the amount of the escrow specified by the Director. Failure to comply with the statute subjects the purchaser to personal liability for any of the seller's sales tax liabilities. Bunting, (supra) at 195.
The Director argues that the failure to give the ten day notice under the statute is a "failure to comply with the provisions of this section" which makes the purchaser "personally liable for the payment to the State of any ... taxes ... due to the State from the seller, transferrer or assignor ...." In support of this argument Director cites Bunting :
We recognize the serious implication of this decision. There is no apparent limitation on the dollar amount of delinquent tax liability that may be assumed by the purchaser of a business if he fails to properly notify the Director of an impending closing. Indeed, a purchaser may assume personal liability for the seller's delinquent taxes in excess of the price he pays for the business assets. Nonetheless, compliance with the notification provisions of the tax ...