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Big Detail from the Liberty Tax Initial Public Offering: The Instant Cash Advance

Adam Rust's picture

Posted December 16, 2011

The parent company of Liberty Tax recently announced its intention to offer to sell shares to the public. The obligatory prospectus filed with the SEC for the benefit of interested investors provides a chance to look under the hood of the nation's third largest preparer of tax returns.

Guess what is under the hood? It turns out that a new kind of refund loan may soon be available at Liberty Tax through a

partnership with an unnamed non-bank lender.

JTH Holdings filed an S-1 in September. JTH makes its money by selling franchises and by taking a cut of future revenues. Almost two of every three dollars in revenue stems from new franchise fees. Generally a franchisee pays $40,000 for a new franchise, although some choose to forego paying a fee in return for giving up almost one-fifth of revenue for the next five years. In exchange for that revenue, JTH provides marketing, software, and other technical assistance.

Here are a few of my favorite takeaways:

  • This company pays a lot in taxes in order to prepare other people's taxes: Private tax preparation services are a big win for coffers of the IRS. JTH reported that it paid $10.8 million in taxes in 2011, which amounts to about forty percent of pre-tax income. Overall, taxes are JTH's fourth largest expense. JTH should probably work harder to reduce its own tax rate. In 2009, JTH Holdings paid more in taxes than did General Electric. While General Electric (see page 150) enjoyed an effective tax rate of minus 11.5 percent in 2009, JTH had to pay 38.5 percent of its pre-tax income to Uncle Sam.
  • Liberty intends to find a way to offer financial products in the future: Liberty says that they have traditionally offered two kinds of loan products - "instant cash advances" and "refund anticipation loans." In their prospectus they discuss a new relationship with an unnamed entity that would probably be able to skirt FDIC purview:
  • "During the 2011 tax season, we entered into a relationship with a non-bank lender to offer ICAs to customers in a limited number of our offices. We intend to expand this program in the 2012 and subsequent tax seasons."

  • These plans mean that the fight against tax refund loans may not go away. Instead, the battle will become the domain of the CFPB and the states.
  • The new loans will cost more: JTH acknowledges that the new loans will probably cost more than the old RALs.
  • The new loans will force JTH to bear more risk for any losses incurred by the loans: In the past, JTH has had to guarantee to take back a share of the losses on loans that were not paid back. "We receive income from the provision of these products through the payment of fees for services by our financial product partners, but we also take additional risk because we guarantee the repayment of these loans." The lack of a debt indicator meant that Republic had to develop an internal means of underwriting. While the system did seem to experience a moderate level of loss, there were still obligations that crimped JTH earnings. The new system meant that JTH was able to benefit from far fewer RALs. Republic approved 248,000 RALs for JTH in 2010 but only 112,000 in 2011. Moreover, loan sizes were half of what they had been in 2010 - an average of $1,561 in 2011 as opposed to $3,160 in 2010.

In the end, investors should see the opportunity presented by the JTH IPO as a bet whose outcome may be contingent upon the ability of JTH to evade regulatory intervention against its ICAs.