Priceline 2014 Annual Report Download - page 36

in July 2009 pending resolution of the appeal. The matter has been stayed while the appeal in another case with the City of San Diego is pending
before the California Supreme Court.
Litigation is subject to uncertainty and there could be adverse developments in these pending or future cases and proceedings. For
example, in January 2013, the Tax Appeal Court for the State of Hawaii held that we and other OTCs are not liable for the State's transient
accommodations tax, but held that the OTCs, including us, are liable for the State's general excise tax on the full amount the OTC 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), with a corresponding charge to cost of revenues, 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 years
ended December 31, 2013 and December 31, 2014 , we paid approximately $20.6 million and $2.2 million , respectively, to the State of Hawaii
related to this ruling. We have filed an appeal now pending before the Hawaii Supreme Court.
Other adverse rulings include a decision in September 2012, in which the Superior Court in the District of Columbia granted summary
judgment in favor of the District and against the OTCs ruling that tax is due on the OTCs' margin and service fees, which we are appealing. As a
result, we increased our accrual for travel transaction taxes (including estimated interest), with a corresponding charge to cost of revenues, by
approximately $4.8 million in September 2012 and by approximately $5.6 million
in the three months ended March 31, 2013. Also, in July 2013,
the Circuit Court of Cook County, Illinois, ruled that we and the other OTCs are liable for tax and other obligations under the Chicago Hotel
Accommodations Tax. In July 2014, we resolved all claims in this case through settlement and the claims against us were dismissed on
September 3, 2014. In addition, in October 2009, a jury in a San Antonio class action found that we and the other OTCs 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. We intend to vigorously appeal the trial court's judgment when it becomes final.
An unfavorable outcome or settlement of pending litigation may encourage the commencement of additional litigation, audit
proceedings or other regulatory inquiries and also 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 could be material to our results
of operations or cash flow in any given operating period. However, we believe that even if we were to suffer adverse determinations in the near
term in more of the pending proceedings than currently anticipated, given results to date it would not have a material impact on our liquidity
because of our available cash.
To the extent that any tax authority succeeds in asserting that our services are subject to travel transaction taxes and that we have a tax
collection responsibility for those taxes, 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 services less competitive (as compared to the services of other OTCs or travel service
providers) and reduce our travel reservation transactions; alternatively, we could choose to reduce the compensation for our services. 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 on its 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 these taxes are due and payable. 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.
Accrual for Travel Transaction Taxes
As a result of this litigation and other attempts by jurisdictions to levy similar taxes, we have established an accrual (including
estimated interest and penalties) for the potential resolution of issues related to travel transaction taxes in the amount of approximately $52
million at December 31, 2014 compared to approximately $55 million at December 31, 2013 . Our legal expenses for these matters are expensed
as incurred and are not reflected in the amount accrued. The actual cost may be less or greater, potentially significantly, than the liabilities
recorded. An estimate for a reasonably possible loss or range of loss in excess of the amount accrued cannot be reasonably made.
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