Priceline 2011 Annual Report Download - page 25

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conclusions of law in connection with this case. In addition to ruling that hotel tax was due from defendants on the markup
and service fee, the court held defendants liable for penalties and interest per the terms of each city's applicable ordinance, but
capped penalties at fifteen percent (15%) of the total amount of unpaid taxes at the time of entry of judgment; ordinances
without a penalty provision are assessed a fifteen percent (15%) penalty under the Texas Tax Code. We expect supplemental
findings of fact and conclusions of law to be issued by the court, followed by a judgment. We intend to vigorously pursue an
appeal of the judgment on legal and factual grounds.
An unfavorable outcome or settlement of pending litigation may encourage the commencement of additional
litigation, audit proceedings or other regulatory inquiries. In addition, an unfavorable outcome or settlement of these actions or
proceedings could result in substantial liabilities for past and/or future bookings, including, among other things, interest,
penalties, punitive damages and/or attorney fees and costs. There have been, and will continue to be, substantial ongoing costs,
which may include "pay first" payments, associated with defending our position in pending and any future cases or
proceedings. An adverse outcome in one or more of these unresolved proceedings could have a material adverse effect on our
business and results of operations and could be material to our earnings or cash flow in any given operating period.
To the extent that any tax authority succeeds in asserting that we have a tax collection responsibility, or we determine
that we have such a responsibility, with respect to future transactions, we may collect any such additional tax obligation from
our customers, which would have the effect of increasing the cost of hotel room reservations to our customers and,
consequently, could make our hotel service less competitive (i.e., versus the websites of other online travel companies or hotel
company websites) and reduce hotel reservation transactions; alternatively, we could choose to reduce the compensation for its
services on "merchant" hotel transactions. Either step could have a material adverse effect on our business and results of
operations.
We estimate that, since our inception through December 31, 2011, we have earned aggregate gross profit, including
fees, from our entire U.S. "merchant" hotel business (which includes, among other things, the differential between the price
paid by a customer for our service and the cost of the underlying room) of approximately $1.4 billion. This gross profit was
earned in over a thousand taxing jurisdictions that we believe have aggregate tax rates (which may include hotel occupancy
taxes, state and local taxes, among other taxes) associated with a typical transaction between a consumer and a hotel that
generally range from approximately 6% to approximately 18%, depending on the jurisdiction. In many of the judicial and other
proceedings initiated to date, municipalities seek not only historical taxes that are claimed to be owed on our gross profit, but
also, among other things, interest, penalties, punitive damages and/or attorney fees and costs. Therefore, any liability
associated with hotel occupancy tax matters is not constrained to our liability for tax owed on our historical gross profit, but
may also include, among other things, penalties, interest and attorneys' fees.
To date, the majority of the taxing jurisdictions in which we facilitate hotel reservations have not asserted that taxes
are due and payable on our U.S. "merchant" hotel business. With respect to municipalities that have not initiated proceedings
to date, it is possible that they will do so in the future or that they will seek to amend their tax statutes and seek to collect taxes
from us only on a prospective basis.
Reserve For Hotel Occupancy and Other Taxes
As a result of this litigation and other attempts by jurisdictions to levy similar taxes, we have established an accrual
for the potential resolution of issues related to hotel occupancy and other taxes in the amount of approximately $33 million as
of December 31, 2011 compared to approximately $26 million as of December 31, 2010 (which includes, among other things,
amounts related to the litigation in San Antonio). The accrual is based on our estimate of the ultimate cost of resolving these
issues. The actual cost may be less or greater, potentially significantly, than the liabilities recorded. An estimate for a possible
loss or range of loss in excess of the amount accrued cannot be reasonably made.
Developments in the Year Ended December 31, 2011
In the year ended December 31, 2011 and to date, six of the approximately fifty currently pending lawsuits and seven
of the total number of currently pending administrative proceedings noted above were commenced. District of Columbia v.
Priceline.com, Inc. (Superior Court for the District of Columbia) was filed on March 22, 2011; McAllister v. Hotels.com, L.P.,
et al. (Circuit Court of Saline County, Arkansas), a putative class action, was filed on February 22, 2011; County of Volusia, et
al. v. Priceline.com, Inc., et al. (Circuit Court of Volusia County, Florida) was filed on April 20, 2011; Town of Breckenridge,
Colorado v. Colorado Travel Company, LLC, et al., (Summit County District Court), a putative class action, was filed on July
25, 2011; County of Nassau v. Expedia, Inc. et al. (Supreme Court of the State of New York, County of Nassau) was filed on
September 26, 2011. This case previously had been dismissed from federal court and was refiled as a state court action. State