Expedia 2013 Annual Report Download - page 61

We do not believe that the amounts we retain as compensation are subject to the cities’ hotel occupancy tax
ordinances. If we prevail in the litigation, for which a pay-to-play payment was made, the jurisdiction collecting
the payment will be required to repay such amounts, plus interest. However, any significant pay-to-play payment
or litigation loss could negatively impact our liquidity.
Certain jurisdictions, including the states of New York, North Carolina, Minnesota and Oregon, the city of
New York, and the District of Columbia, have enacted legislation seeking to tax online travel company services
as part of sales taxes for hotel occupancy. We are currently remitting taxes to the city of New York, the state of
New York, the state and local jurisdictions of South Carolina, the State of Minnesota, the District of Columbia,
the state and local jurisdictions of Georgia, Anne Arundel, Maryland, and the State of North Carolina and
Durham County, North Carolina.
Hawaii Tax Court Litigation (General Excise Tax). On January 31, 2011, the online travel companies
received final notices from the Hawaii Department of Taxation of assessment for general excise taxes for the tax
years 2000 to 2011 on their services relating to non-commissioned hotel room reservations. The companies
appealed these assessments. On January 11, 2013, the Hawaii tax court ruled that the online travel companies are
obligated to remit past Hawaii general excise taxes with interest on both the amount paid to the online travel
companies for their services and the amount paid to the hotel for the room; thus subjecting the hotel’s charge for
the room to double taxation because general excise taxes on the hotel room had already been paid for all of the
years at issue. For additional information on these legal proceedings, see Part I, Item 3, Legal Proceedings.
As a pre-condition to appealing the tax court rulings, the Expedia companies were required to pay-to-play an
amount equal to taxes, penalties and interest. Payment of these amounts, if any, is not an admission that we
believe we are subject to the taxes in question. To the extent our appeal is successful in reducing or eliminating
the assessed amounts, the state of Hawaii would be required to repay such amounts, plus interest. The total
amount that the Expedia companies paid in 2013 to appeal the tax court ruling was $171 million, which is
comprised of $78 million in taxes, $41 million in penalties and $52 million in interest.
During 2012, we expensed $110 million, and during 2013, we expensed an additional $64 million for
amounts required or expected to be paid prior to appealing the tax court’s ruling. It is reasonably possible that we
will incur amounts in excess of the amounts expensed in 2012 and 2013, which we estimate could be up to $38
million after consideration of additional outstanding assessments. The ultimate resolution of these contingencies
may be greater or less than the liabilities recorded and our estimates of additional assessments.
Segments
We have two reportable segments: Leisure and Egencia. Our Leisure segment provides a full range of travel
and advertising services to our worldwide customers through a variety of brands including: Expedia.com and
Hotels.com in the United States and localized Expedia and Hotels.com websites throughout the world, Expedia
Affiliate Network, Hotwire.com, Venere, eLong, trivago and Classic Vacations. Our Egencia segment provides
managed travel services to corporate customers in North America, Europe, and the Asia Pacific region.
Operating Metrics
Our operating results are affected by certain metrics, such as gross bookings and revenue margin, which we
believe are necessary for understanding and evaluating us. Gross bookings represent the total retail value of
transactions booked for both agency and merchant transactions, recorded at the time of booking reflecting the
total price due for travel by travelers, including taxes, fees and other charges, and are generally reduced for
cancellations and refunds. As travelers have increased their use of the internet to book travel arrangements, we
have generally seen our gross bookings increase, reflecting the growth in the online travel industry, our organic
market share gains and our business acquisitions. Revenue margin is defined as revenue as a percentage of gross
bookings.
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