(Bloomberg) Apparently, absolutely free is an enticing price-point.
TurboTax, already the dominant player in online tax filing, has boosted customers by 9 percent through Feb. 20 compared with the same period a year ago, according to a quarterly earnings report from parent Intuit Inc. TurboTax is taking market share from both professional tax preparers and its online rivals, the company says.
"They won the first part of tax season," said Gil Luria, an analyst with Wedbush Securities Inc. For its victory, TurboTax can thank its decision to go completely free for certain simple tax returns and backing it with "a compelling ad campaign," Luria said. A series of ads told viewers that "it doesn't take a genius to do your taxes." Academy Award-winning actor Anthony Hopkins, meanwhile, starred in a TurboTax Super Bowl ad touting its "Absolute Zero" price offering.
In reality, most TurboTax customers pay far more than zero. Filing is free only for those using 1040EZ and 1040A forms (Their state returns are free, too). The offer is designed to bring in young taxpayers and get them hooked before their tax situations get more complicated. The free customer now turns into a paying customer later, or so the thinking goes.
For now at least, the offer may be undercutting TurboTax's online and offline competitors. It's designed to draw people away from H&R Block Inc.'s 10,000 U.S. retail locations and other professional tax preparers.
And it hurts the marketing of TaxAct and other online tax prep sites that have spent decades leveraging cheaper prices to compete. Intuit estimated that the entire do-it-yourself category has gained about two percentage points of market share from assisted tax preparation so far this year. And within the online do-it-yourself category, Chief Executive Officer Brad Smith said TurboTax is seeing the strongest "market share advances at this time of the year in my recollection."
That could be bad news for TaxAct, a small Iowa company and the third-largest U.S. online tax preparer after TurboTax and H&R Block.
TaxAct contends it's still the "best deal in tax." In a statement, the company says it's "focused on a multi-year approach on share that allows us to meet our financial objectives." H&R Block, which reports earnings March 3, didn't respond to requests for comment on TurboTax's results.
TaxAct matches TurboTax's free offering for simple returns and charges far less for most other taxpayers. For the most complicated returns, TaxAct can charge as little as a third of the price. For an investor completing a federal and state return, TaxAct charges $40, H&R Block's online software charges $72, and TurboTax costs $92. Those prices tend to go up as the filing deadline approaches: TaxAct was charging investors $30 a week ago.
Attention now turns to the second half of the tax season, when a very different kind of taxpayer gets around to filing their 1040s. Early taxpayers tend to be lower-income Americans who know they're getting a refund check. Late filers are more likely to owe the Internal Revenue Service money and tend to have more complicated finances.
For the procrastinators, then, ads for "free" offerings are less compelling. Last year, TaxAct was able to recover from market share losses early in the season by appealing to more advanced taxpayers later on, Luria said.
In the stressful last month of the tax season, taxpayers are also more likely to be looking for professional help—a factor that could give an edge to H&R Block.
