Shutterfly 2010 Annual Report Download - page 23

Our effective tax rate may be subject to fluctuation from federal and state audits, and stock-based compensation activity.
Future tax audits by taxing agencies for the open tax years could lead to fluctuations in our effective tax rate because the taxing authority
may disagree with certain assumptions we have made regarding appropriate credits and deductions in filing our tax returns.
Under current stock option tax regulations, our effective tax rate is subject to fluctuations as a result of stock based compensation activity;
this includes items such as shortfalls associated with the vesting of restricted stock units and restricted stock awards, disqualifying dispositions
when employees exercise and sell their incentive stock options within a two year period, and cancellation of vested non-qualified stock options.
Government regulation of the Internet and e-
commerce is evolving, and unfavorable changes or failure by us to comply with these
regulations could substantially harm our business and results of operations.
We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-
commerce.
Existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover
taxation, restrictions on imports and exports, customs, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic
contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access and
the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property use and ownership,
sales and other taxes, fraud, libel and personal privacy apply to the Internet and e-
commerce as the vast majority of these laws were adopted
prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-
commerce. Those laws that do
reference the Internet are only beginning to be interpreted by the courts and their applicability and reach are therefore uncertain. For example,
the Digital Millennium Copyright Act, or DMCA, is intended, in part, to limit the liability of eligible online service providers for including (or
for listing or linking to third-
party websites that include) materials that infringe copyrights or other rights of others. Portions of the
Communications Decency Act, or CDA, are intended to provide statutory protections to online service providers who distribute third-
party
content. We rely on the protections provided by both the DMCA and CDA in conducting our business. Any changes in these laws or judicial
interpretations narrowing their protections will subject us to greater risk of liability and may increase our costs of compliance with these
regulations or limit our ability to operate certain lines of business. The Children’s Online Protection Act and the Children’
s Online Privacy
Protection Act are intended to restrict the distribution of certain materials deemed harmful to children and impose additional restrictions on the
ability of online services to collect user information from minors. In addition, the Protection of Children From Sexual Predators Act of 1998
requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. The costs of
compliance with these regulations may increase in the future as a result of changes in the regulations or the interpretation of them. Further, any
failures on our part to comply with these regulations may subject us to significant liabilities. Those current and future laws and regulations or
unfavorable resolution of these issues may substantially harm our business and results of operations.
Legislation regarding copyright protection or content interdiction could impose complex and costly constraints on our business model.
Because of our focus on automation and high volumes, our operations do not involve, for the vast majority of our sales, any human-
based
review of content. Although our website’
s terms of use specifically require customers to represent that they have the right and authority to
reproduce the content they provide and that the content is in full compliance with all relevant laws and regulations, we do not have the ability to
determine the accuracy of these representations on a case-by-
case basis. There is a risk that a customer may supply an image or other content that
is the property of another party used without permission, that infringes the copyright or trademark of another party, or that would be considered
to be defamatory, pornographic, hateful, racist, scandalous, obscene or otherwise offensive, objectionable or illegal under the laws or court
decisions of the jurisdiction where that customer lives. There is, therefore, a risk that customers may intentionally or inadvertently order and
receive products from us that are in violation of the rights of another party or a law or regulation of a particular jurisdiction. If we should become
legally obligated in the future to perform manual screening and review for all orders destined for a jurisdiction, we will encounter increased
production costs or may cease accepting orders for shipment to that jurisdiction. That could substantially harm our business and results of
operations.
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