Expedia 2005 Annual Report Download - page 39

carryforward periods available to us for tax reporting purposes, as well as other relevant factors. We may
establish a valuation allowance to reduce deferred tax assets to the amount we expect to realize. Due to
inherent complexities arising from the nature of our businesses, future changes in income tax law, tax
sharing agreements or variances between our actual and anticipated operating results, we make certain
judgments and estimates. Therefore, actual income taxes could vary from these estimates.
In conjunction with the Spin-Off we entered into a Tax Sharing Agreement with IAC. We will file a
consolidated tax return with IAC for the period from January 1, 2005, to August 8, 2005. There are two
methods that can be used for the calculation of income taxes for that period: close-the-book or pro-rata.
IAC has sole discretion to determine which method. We have made assumptions as to how IAC will
choose to characterize certain transactions and as to which method it will choose. Should these
assumptions differ materially from actions IAC takes, our balance sheet classification could be materially
affected as could our use of certain deductions and the period in which our net operating loss
carryforwards are fully utilized.
Other Long-Term Liabilities
Various Legal and Tax Contingencies. We record liabilities to address potential exposures related to
business and tax positions we have taken that have been or could be challenged by taxing authorities. In
addition, we record liabilities associated with legal proceedings and lawsuits. These liabilities are recorded
when the likelihood of payment is probable and the amounts can be reasonably estimated. The
determination for required liabilities is based upon analysis of each individual tax issue, or legal
proceeding, taking into consideration the likelihood of adverse judgments and the range of possible loss. In
addition, our analysis may be based on discussions with outside legal counsel. The ultimate resolution of
these potential tax exposures and legal proceedings may be greater or less than the liabilities recorded.
Occupancy Tax. Some states and localities impose a transient occupancy or accommodation tax, or a
form of sales tax, on the use or occupancy of hotel accommodations. Hotel operators generally collect and
remit these taxes to the various tax authorities. Consistent with this practice, when a customer books a
room through one of our travel services, the hotel charges taxes based on the room rate paid to the hotel,
we pay those taxes invoiced by the hotel and we recover an equivalent amount from the customer. We do
not collect or remit occupancy taxes, nor do we pay occupancy taxes to the hotel operator on the portion
of the customer payment we retain. Some jurisdictions have questioned our practice in this regard. While
the applicable tax provisions vary among the jurisdictions, we generally believe that we are not required to
collect and remit such occupancy taxes. We are engaged in discussions with tax authorities in various
jurisdictions to resolve this issue. Some tax authorities have brought lawsuits asserting that we are required
to collect and remit occupancy tax. The ultimate resolution in all jurisdictions cannot be determined at this
time.
We have established a reserve with respect to potential occupancy tax liability for prior and current
periods, consistent with applicable accounting principles and in light of all current facts and circumstances.
A variety of factors could affect the amount of the liability (both past and future), which factors include,
but are not limited to, the number of, and amount of revenue represented by, jurisdictions that ultimately
assert a claim and prevail in assessing such additional tax or negotiate a settlement and changes in relevant
statutes.
We note that there are more than 7,000 taxing jurisdictions in the United States, and it is not feasible
to analyze the statutes, regulations and judicial and administrative rulings in every jurisdiction. Rather, we
have obtained the advice of state and local tax experts with respect to tax laws of certain states and local
jurisdictions that represent a large portion of our hotel revenue. It is possible that some jurisdictions may
introduce new legislation regarding the imposition of occupancy taxes on businesses that arrange the
booking of hotel accommodations. We will continue to monitor the issue closely and provide additional
disclosure, as well as adjust the level of reserves, as developments warrant. Additionally, we and certain of
our businesses are involved in occupancy tax related litigation which is discussed in ""Item 3 Ì Legal
Proceedings.''
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