Priceline 2011 Annual Report Download - page 75

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Tax Recovery Charge, Occupancy Taxes and State and Local Taxes
The Company provides an internet travel service to facilitate online travel purchases between consumers and travel
suppliers, including airline ticket, hotel and rental car reservations, and sometimes as part of a vacation package reservation.
For merchant model transactions, the Company charges the customer an amount intended to cover the taxes that the Company
anticipates the service provider will owe and remit to the local taxing authorities ("tax recovery charge"). Tax rate information
for calculating the tax recovery charge is provided to the Company by its suppliers.
In a handful of taxing jurisdictions, the Company recently was required by passage of a new statute or by court order
to start collecting and remitting certain taxes (local occupancy tax and/or sales tax) imposed upon its margin and/or service fee.
In those jurisdictions, the Company is collecting and remitting tax on its margin and/or service fee. Except in those
jurisdictions, the Company does not charge the customer or remit occupancy or other taxes based on its margin or service fee,
because the Company believes that such taxes are not owed on its compensation for its services (refer to Note 16). The tax
recovery charge and occupancy and sales taxes collected from customers and remitted to those jurisdictions are reported on a
net basis on the Consolidated Statement of Operations.
Advertising - Online — Online advertising expenses consist primarily of the costs of (1) search engine keyword
purchases; (2) referrals from meta-search sites and travel research websites; (3) affiliate programs; (4) banner and pop-up
advertisements; and (5) email campaigns. Online advertising expense is generally recognized as incurred. Included in
"Accrued expenses and other current liabilities" on the Consolidated Balance Sheets are accrued online advertising liabilities of
$69.2 million and $64.3 million at December 31, 2011 and 2010, respectively.
Advertising - Offline — Offline advertising expenses are comprised primarily of costs of domestic television, print,
and radio advertising for priceline.com. The Company expenses the production costs of advertising the first time the
advertising takes place.
Sales and Marketing — Sales and marketing expenses consist primarily of (1) credit card processing fees associated
with merchant transactions; (2) fees paid to third-parties that provide call center, website content translations and other
services; (3) provisions for credit card chargebacks; and (4) provisions for bad debt, primarily related to agency hotel
commission receivables.
Personnel — Personnel expenses consist of compensation to the Company’s personnel, including salaries, bonuses,
payroll taxes, employee health insurance and other benefits, and stock based compensation. Included in "Accrued expenses
and other current liabilities" on the Consolidated Balance Sheets are accrued compensation liabilities of $65.7 million and
$54.6 million at December 31, 2011 and 2010, respectively.
Stock-Based Compensation — The cost of stock-based transactions are recognized in the financial statements based
upon fair value. The fair value of restricted stock, performance share units and restricted stock units is determined based on the
number of units or shares, as applicable, granted and the quoted price of the Company’s common stock as of the grant date.
Stock-based compensation related to performance share units reflects the estimated probable outcome at the end of the
performance period. The fair value of stock options is determined as of the grant date using the Black-Scholes valuation
model. Fair value is recognized as expense on a straight line basis, net of estimated forfeitures, over the employee requisite
service period.
The fair value at grant date for restricted stock units with a market condition is estimated, based on the complexity of
the award, using both closed-form models and lattice models. All compensation cost for an award that has a market condition
is recognized as stock based compensation cost if the requisite service period is fulfilled, even if the market condition is never
satisfied.
The benefits of tax deductions in excess of recognized compensation costs are reported as a credit to additional paid-in
capital and as financing cash flows, but only when such excess tax benefits are realized by a reduction to current taxes payable.
See Note 3 for further information on stock-based awards.
Information Technology — Information technology expenses are comprised primarily of outsourced data center costs,
system maintenance and software license fees, data communications and other expenses associated with operating the
Company’s Internet sites and payments to outside contractors. Such costs are expensed as incurred.