Priceline 2014 Annual Report Download - page 25

assessments or started inquiries relating to the payment of travel transaction taxes. See Part I Item 3 Legal Proceedings and Note 16 to the
Consolidated Financial Statements for a description of these pending cases and proceedings. Additional state and local jurisdictions may assert
that we are subject to, among other things, travel transaction taxes and could seek to collect such taxes, either retroactively or prospectively, or
both.
In connection with some travel transaction tax audits and assessments, we 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 laws in judicial proceedings. This requirement is
commonly referred to as "pay to play" or "pay first." Payment of these amounts, if any, is not an admission that we believe that we are subject to
such taxes and, even if we make such payments, we intend to continue to vigorously assert our position that we should not be subject to such
taxes.
Litigation is subject to uncertainty and there could be adverse developments in these pending or future cases and proceedings. For
example, in September 2012, the Superior Court in the District of Columbia granted a summary judgment in favor of the city and against online
travel companies. Similarly, in January 2013, the Tax Appeal Court for the State of Hawaii held that online travel companies, including us, are
liable for the State's general excise tax on the full amount the online travel company collects from the customer for a hotel room reservation,
without any offset for amounts passed through to the hotel. We recorded an accrual for travel transaction taxes (including estimated interest and
penalties) of approximately $16.5 million in December 2012 and approximately $18.7 million in the three months ended March 31, 2013,
primarily related to this ruling. During the year ended December 31, 2013 and December 31, 2014 the Company paid approximately $20.6
million and $2.2 million , respectively, to the State of Hawaii related to this ruling. The Company has filed an appeal with the Tax Appeal Court
and intends to vigorously appeal this ruling. These decisions and any similar decisions in other jurisdictions could have a material adverse effect
on our business, margins and results of operations. 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 results of operations or cash flows in any given fiscal 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 travel reservations to our customers and, consequently, could make our travel reservation service less competitive
(i.e., versus the websites of other online travel companies or travel service providers) and reduce our travel reservation transactions;
alternatively, we could choose to reduce our profit on affected travel transactions. Either action could have a material adverse effect on our
business and results of operations.
In many of the judicial and other proceedings initiated to date, the taxing jurisdictions 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 travel transaction tax matters is not constrained to our liability for tax owed, but may also include, among other things,
penalties, interest and attorneys' fees. To date, the majority of the taxing jurisdictions in which we facilitate travel reservations have not asserted
that taxes are due and payable on our travel services. With respect to taxing jurisdictions 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.
We face increased risks as the level of our debt increases.
We have a substantial amount of outstanding indebtedness and we may incur substantial additional indebtedness in the future, including
through public or private offerings of debt securities. Our outstanding indebtedness and any additional indebtedness we incur may have
significant consequences, which could include:
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• requiring the dedication of a significant portion of our cash flow from operations to service our indebtedness, thereby reducing the
amount of cash flow available for other purposes, including capital expenditures, share repurchases and acquisitions;
• increased vulnerability to downturns in our business, to competitive pressures and to adverse changes in general economic and industry
conditions;