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Watts v. Jackson Hewitt Tax Service Inc.

August 16, 2008


The opinion of the court was delivered by: Dora L. Irizarry, United States District Judge

Memorandum and Order

Plaintiffs Dana Watts and Yadira Mosquera, on behalf of themselves and other similarly-situated customers of Jackson Hewitt Tax Services, Inc. ("the Company"), brought this action seeking damages and injunctive relief for defendants' alleged deceptive pricing practices in their sale of tax return preparation services and related financial products. Plaintiffs name as defendants, the Company and two of its subsidiaries, Jackson Hewitt, Inc. (the "franchisor") and Tax Service of America, Inc. (collectively "the Company Defendants"), along with Map Computax NY, Inc., an agent of the Company in New York, its owner Mandeep Sobti, and Anjeet Sobti, a Jackson Hewitt franchisee (the latter trio collectively "the Franchisee Defendants"). The two sets of defendants separately moved, pursuant to Fed. R. Civ. P. 12(b)(6), to dismiss all of five causes of action under the New Jersey Consumer Fraud Act ("NJCFA"), the New York General Business Law ("NYGBL"), the New York City Administrative Code ("City Code") and common law for fraud and unjust enrichment. Due to the similarity of the motions, the court considers them in tandem. For reasons set forth below, the motions to dismiss are granted as to the plaintiffs' NJCFA claim, but denied as to the others.

I. Facts

The following facts drawn from the complaint are deemed plausible for the purpose of this motion unless otherwise noted.

A. The Parties

The Company, a publicly-traded corporation based in Parsippany, New Jersey, is the second largest professional income tax return preparation service in the United States. It has more than 6,000 directly-owned and franchised offices that prepared 3.7 million income tax returns in fiscal year 2006.*fn1 (Compl. ¶ 11). Through its franchisor, the Company provides franchisees with training, administrative support, access to its proprietary computer tax return preparation software, and monitors their quality of customer service, accuracy of tax returns, office appearance and personnel training. (Id. ¶¶ 16-17). In return, the Company collects from each franchisee a franchise fee along with royalties and advertising fees equal to a portion of the franchisee's revenues. (Id. ¶ 15).

Mandeep Sobti is the owner of Map Computax NY, Inc., a company headquartered in New York, which has entered into a number of franchise agreements with the franchisor. (Compl. ¶¶ 18, 20). He and his wife, defendant Anjeet Sobti, own and operate more than a dozen Jackson Hewitt franchises in New York and New Jersey, including the office in Brooklyn where both of the named plaintiffs purchased tax return preparation services and related financial products in the spring of 2005. (Compl. ¶¶ 20-21, & 60 and at pp. 36-38)

Plaintiffs Dana Watts and Yadira Mosquera are both residents of New York whose 2004 federal and state income tax returns were prepared and filed by the Jackson Hewitt office at 439 Knickerbocker Avenue in the Bushwick section of Brooklyn. (Comp. ¶¶ 6-7). They complain of being deceived by misleading minimum prices and being overcharged by undisclosed fees that were hidden in their non-itemized general tax return preparation bill.

B. Defendants' Tax Return Preparation Service and Related Financial Products

Defendants promoted the affordability of their tax return preparation services through the Company's website and fliers in Jackson Hewitt offices. (Compl. ¶ 24). The fliers posted minimum fees to prepare federal and/or state income tax returns. The minimum fees were divided according to Long Form and Short Form returns. (Id. ¶¶ 25, 26). Long Form returns are for customers who need to itemize deductions and report property or investment income, while the simpler, less costly Short Form returns are for customers who do not. (Id. ¶ 48). According to the complaint, the defendants' posted minimum fees were $27 for a New York State ("NYS") Long Form and $22 for an NYS Short Form. (Compl. ¶ 62).*fn2 These minimum fee fliers also offered a caveat that the posted fees may vary according to the complexity of the tax return and the number of schedules and tax forms required. The Company's website noted that tax preparation fees vary with the "complexity" of tax returns, with more complex returns taking more time to process and therefore costing more. The website referred customers to local offices for more specific information. (Id. ¶ 26).

Customers were given a general bill that contained a single, non-itemized charge called the Tax Preparation Fee. The bill did not disclose to customers, the fees and charges that contributed to the total Tax Preparation Fee. (Compl. ¶ 46). Both plaintiffs were charged more than the posted minimum fees for the preparation of their income tax returns. Neither received an itemized breakdown of their Tax Preparation Fee.

The plaintiffs did not pay for their tax return preparation service out of pocket. They purchased financial products marketed by defendants that enable customers to pay for the cost of preparing their tax returns with their eventual tax refunds.

The Accelerated Refund Check ("ACR") allows customers who do not have a personal bank account to receive their tax refund from the Internal Revenue Service ("IRS") via electronic direct deposit instead of waiting for the refund check to arrive by mail. For an application fee of $75 and a bank fee of $25, the Company arranges with a third-party bank to create a temporary bank account in the customer's name to receive the direct deposit. Once the IRS electronically deposits the tax refund into this bank account, usually about two weeks after the tax return is filed, the bank would then deduct its fees and the defendants' fees from the deposit, issue the remainder in a check to the customer, and close the bank account. (Compl. ¶¶ 40-46).

The Refund Anticipation Loan ("RAL") enables customers to borrow against their anticipated tax refund before it is issued by the IRS. These loans give customers even faster access to their tax refund than the ACR, albeit with an extra finance charge. The Company arranges for a third-party bank to issue an advance on all or a portion of the customer's estimated tax refund return. The advanced money is usually lent to the customer a day or two after the tax return is filed. The principal of this loan, along with a $75 application fee, a $25 bank fee, the finance charge equal to 3% of the principal and the defendants' Tax Preparation Service Fee are paid for by the tax refund about two weeks later. (Compl. ¶¶ 30-35). The 3% finance charge on these short-term, low-risk loans translates to annualized interest rates that can exceed 300%. (Id. ¶¶ 35-36, 59). RALs are subject to strict state and local regulation that require the fees for this product to be separately disclosed from the Tax Return Preparation Fee so consumers can readily discern the true cost of these financial products.

C. The Plaintiffs' Factual Allegations

In the complaint, the plaintiffs contend that they and similarly-situated customers were defrauded by defendant's deceptive practices, which: (1) charged an automatic 15% "Multiplier Fee" above the posted minimum fees; (2) charged them for the more expensive NYS Long Form despite their eligibility to file cheaper Short Form returns; and (3) buried additional "hidden" fees for the financial products into the Tax Preparation Fee when these fees ought to have been separately disclosed. (Compl. ¶ 37).

In support of these allegations, plaintiffs referred to the defendants' own itemized breakdowns of two other customers' Tax Preparation Fees. (See Compl. ¶¶ 28, 45). These breakdowns were obtained from computer screens of Jackson Hewitt employees running the Company's proprietary software, and summarized in the complaint.*fn3 Both summaries contain a line item showing a 115% multiplier and a corresponding charge of 15% applied to each customer's tax preparation charges. For one of the customers, the complaint compared defendants' internal breakdown of the Tax Preparation Fee with the general non-itemized bill given to the customer. The comparison reveals that the total amount charged on the general bill was $25 more than the total owed according to the defendants' internal itemized accounting. (See Compl. ¶ 45). Plaintiffs attribute this difference to a "hidden" $25 financial product fee that defendants added to the Tax Preparation Fee of the general bill. The complaint does not provide factual assertions that support or explain the allegation that the customers were charged for the NYS Long Form when in fact they were eligible for the NYS Short Form.

The complaint also alleges that the defendants trained their employees to avoid giving itemized breakdowns of the Tax Preparation Fee so customers would not notice the hidden fees that were added to the Tax Preparation Fee. (Compl. ¶¶ 38, 52). Defendants made it costly for customers to obtain estimates of what their tax preparation bill would be prior to committing to buy the defendants' services. Employees were trained to demand a customer's Federal W-2 Form before agreeing to give an exact price quote. Customers who provided their W-2 forms were given a non-itemized price quote, but if they declined the defendants' services, they were charged a previously undisclosed $25 "hostage fee" for the return of their Federal Form W-2. (Compl. ¶¶ 56-57). Plaintiffs complain that the combined effect of the defendants' non-disclosure of its fees and the difficulty in obtaining estimates made customers less able to compare the defendants' posted minimum prices with those of competitors. (Compl. ¶ 89).

The defendants did not provide an itemized accounting of the plaintiffs' tax preparation bill. The two plaintiffs gave the following accounts of their bills in the complaint:

Table 1: Plaintiffs' itemized breakdown of their bills

Fee itemDana Watt's billYadira Mosquera's bill Tax Return Preparation Fee$130$212 New York State Long Form$27*$27* Federal Form$57*$57* Non-dependent (head of household) fee$7*  Child and Dependent Care Credits-$72* Unemployment Insurance compensation-$6* Hidden RAL fee$25*$25* Hidden ACR fee-$25* Gold Guarantee$30- Documentation Fee for RAL and ACR Applications$75$75 Bank Processing Fee for RAL and ACR$35$35 Finance Charge for RAL$42$115 Total$312$437

*denotes charges not disclosed in defendants' general bill. (Compl. ¶¶ 59, 60).

These accounts do not appear to mention the 15% multiplier that the defendants are alleged to have assessed automatically on every customer. (Compl. ΒΆ 28). The breakdown of the four undisclosed items in ...

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