Priceline 2011 Annual Report Download - page 95

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typically seeks compensatory damages, disgorgement, penalties available by law, attorneys’ fees and other relief. The
Company is also involved in one consumer lawsuit relating to, among other things, the payment of hotel occupancy taxes and
service fees. In addition, approximately sixty municipalities or counties, and at least six states, have initiated audit proceedings
(including proceedings initiated by more than forty municipalities in California), issued proposed tax assessments or started
inquiries relating to the payment of hotel occupancy and other taxes (i.e., state and local sales tax). Additional state and local
jurisdictions are likely to assert that the Company is subject to, among other things, hotel occupancy and other taxes (i.e., state
and local sales tax) and could seek to collect such taxes, retroactively and/or prospectively.
With respect to the principal claims in these matters, the Company believes that the ordinances at issue do not apply to
the service it provides, namely the facilitation of reservations, and, therefore, that it does not owe the taxes that are claimed to
be owed. Rather, the Company believes that the ordinances at issue generally impose hotel occupancy and other taxes on
entities that own, operate or control hotels (or similar businesses) or furnish or provide hotel rooms or similar accommodations.
In addition, in many of these matters, municipalities have asserted claims for "conversion" — essentially, that the Company has
collected a tax and wrongfully "pocketed" those tax dollars — a claim that the Company believes is without basis and has
vigorously contested. The municipalities that are currently involved in litigation and other proceedings with the Company, and
that may be involved in future proceedings, have asserted contrary positions and will likely continue to do so. From time to
time, the Company has found it expedient to settle, and may in the future agree to settle, claims pending in these matters
without conceding that the claims at issue are meritorious or that the claimed taxes are in fact due to be paid.
In connection with some of these tax audits and assessments, the Company may be required to pay any assessed taxes,
which amounts may be substantial, prior to being allowed to contest the assessments and the applicability of the ordinances in
judicial proceedings. This requirement is commonly referred to as "pay to play" or "pay first." For example, the City of San
Francisco assessed the Company approximately $3.4 million (an amount that includes interest and penalties) relating to hotel
occupancy taxes, which the Company paid in July 2009. Payment of these amounts, if any, is not an admission that the
Company believes it is subject to such taxes and, even if such payments are made, the Company intends to continue to assert its
position vigorously. The Company has successfully argued against a "pay first" requirement asserted in another California
proceeding.
Litigation is subject to uncertainty and there could be adverse developments in these pending or future cases and
proceedings. For example, in October 2009, a jury in a San Antonio class action found that the Company and the other online
travel companies that are defendants in the lawsuit "control" hotels for purposes of the local hotel occupancy tax ordinances at
issue and are, therefore, subject to the requirements of those ordinances. On July 1, 2011, the court issued findings of fact and
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. The Company expects
supplemental findings of fact and conclusions of law to be issued by the court, followed by a judgment. The Company intends
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 the Company's 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 the
Company's business and results of operations and could be material to the Company's earnings or cash flow in any given
operating period.
To the extent that any tax authority succeeds in asserting that the Company has a tax collection responsibility, or the
Company determines that it has such a responsibility, with respect to future transactions, the Company may collect any such
additional tax obligation from its customers, which would have the effect of increasing the cost of hotel room reservations to its
customers and, consequently, could make the Company’s hotel service less competitive (i.e., versus the websites of other online
travel companies or hotel company websites) and reduce hotel reservation transactions; alternatively, the Company could
choose to reduce the compensation for its services on "merchant" hotel transactions. Either step could have a material adverse
effect on the Company’s business and results of operations.
The Company estimates that, since its inception through December 31, 2011, it has earned aggregate gross profit,
including fees, from its entire U.S. "merchant" hotel business (which includes, among other things, the differential between the
price paid by a customer for the Company’s service and the cost of the underlying room) of approximately $1.4 billion. This