Shutterfly 2014 Annual Report Download - page 30

costs of complex intellectual property litigation more effectively than we can because they have
substantially greater resources. Uncertainties resulting from the initiation and continuation of any
litigation could limit our ability to continue our operations.
Alternatively, we may be required to, or decide to, enter into a license with a third party. Any future
license required under any other party’s patents may not be made available on commercially acceptable
terms, if at all. In addition, such licenses are likely to be non-exclusive and, therefore, our competitors may
have access to the same technology licensed to us. If we fail to obtain a required license and are unable to
design around a patent, we may be unable to effectively conduct certain of our business activities, which
could limit our ability to generate revenues and harm our results of operations and possibly prevent us
from generating revenues sufficient to sustain our operations.
Various governmental legal proceedings, investigations or audits may adversely affect our business and financial
performance.
We may be subject to investigations or audits by governmental authorities and regulatory agencies,
which can occur in the ordinary course of business or which can result from increased scrutiny from a
particular agency towards an industry, country or practice. For example, we are currently under audit by
the Internal Revenue Service (IRS) for the tax year ended December 31, 2010. The resolution of such legal
proceedings, investigations or audits could require us to pay substantial amounts of money or take actions
that adversely affect our operations. In addition, defending against these claims may involve significant
time and expense. Given the visibility of our brands, we may regularly be involved in legal proceedings,
government investigations or audits that could adversely affect our business and financial performance.
We may be subject to past or future liabilities for collection of sales and use taxes, and the payment of corporate level
taxes.
Our policies concerning the collection of sales and use taxes and the payment of certain corporate
level taxes have been based upon decisions of the U.S. Supreme Court that determine when a taxpayer is
deemed to have nexus with a state sufficient to impose tax obligations under the Commerce Clause of the
U.S. Constitution. Those Supreme Court decisions require that the taxpayer be physically present before a
state can require the collection of sales and use taxes. States are currently attempting to expand the
definition of what constitutes physical presence for sales and use taxes. At the same time, the standard
governing the imposition of other taxes, for instance, corporate income taxes, is less established and a
number of state courts have concluded that the Commerce Clause definition of nexus should be expanded
to include either ‘‘physical’’ or ‘‘economic’’ presence (essentially marketing activities) which is a broader
definition than is used for sales and use tax.
We collect sales and use taxes in jurisdictions where we have employees and/or property and in other
states where we have implemented joint sales efforts with Target Corporation and other retailers.
While we believe the U.S. Supreme Court decisions support our policies concerning the collection and
payment of taxes, tax authorities could disagree with our interpretations. If sustained, those authorities
might seek to impose past as well as future liability for taxes and/or penalties. Such impositions could also
impose significant administrative burdens and decrease our future sales. Moreover, the U.S. Congress has
been considering various initiatives that could limit or supersede the U.S. Supreme Court’s position
regarding sales and use taxes.
29