State law does supercede a town ordinance, that much is true, insofar as the two are mutually exclusive. It is wrong to say that the municipal ordinance supercedes state law.
But note that just because state law defines it one way doesn't mean that a municipality can't define it another way. Furthermore, limited scope definitions in a state law might not give the owner a "right" to that as a general definition. That is, this is a Fire Code. It defines B&B for the purposes of the fire code. So when the fire code is talking about B&Bs, it's referencing that definition.
See also the following provision, immediately before 5:70-1.5:
§ 5:70-1.4 Applicability
(c) Nothing in this Code shall be construed, interpreted or applied to abrogate, nullify or abolish any law, ordinance or code adopted by any local government regulating the repair, removal, demolition, use, location, occupancy or maintenance of buildings and property as specifically provided herein. When any provision of this Code is found to be in conflict with any zoning, safety, health or other applicable law, ordinance or code of the jurisdiction existing on the effective date of this Code or hereafter adopted, the provision which establishes the higher standard for the promotion and protection of the safety and welfare of the public shall prevail.
So the limited scope of this provision is for safety and welfare. It's not a general right or definition that a B&B does not have to be owner occupied, nor is it a granting of a right that an owner necessarily does not have to occupy the B&B.
IF the law granted a right to owners that they did not have to occupy, and specifically forbade municipalities from abrogating that provision, the state law would govern. But this is a limited scope definition, applicable only to fire code regulations, and specifically does not "abrogate, nullify or abolish any law, ordinance or code adopted by any local government regulating the repair, removal, demolition, use, location, occupancy or maintenance of buildings and property as specifically provided herein."
So while the Borough is wrong in their statement that the ordinance supersedes state law (because it cannot do so), there's no conflict and the Borough CAN designate that B&Bs have to be owner-occupied. The State fire code removed that requirement to increase the number of situations where a B&B would fall under the fire code requirements. It did not do that for the purpose of giving owners a right to having a B&B where they didn't have to reside.
I know this is probably not what you wanted to hear, but it is the law. I hope that clears things up anyway. If you have any other questions, please let me know. If not, and you have not yet, please rate my answer AND press the "submit" button, if applicable. Please note that I don't get any credit for the time and effort that I spent on this answer unless and until you rate it positively (good or better). Thank you, ***** ***** luck to you!