Etsy 2015 Annual Report Download - page 31

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In addition, we may not be effective in policing unauthorized use of our intellectual property. Even if we do detect violations, we may need to engage in
litigation to enforce our intellectual property rights. Any enforcement efforts we undertake, including litigation, could be time-consuming and expensive and
could divert our management’s attention. In addition, our efforts may be met with defenses and counterclaims challenging the validity and enforceability of
our intellectual property rights or may result in a court determining that our intellectual property rights are unenforceable. If we are unable to cost-effectively
protect our intellectual property rights, then our business could be harmed.
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The software underlying our platform is highly complex and may contain undetected errors or vulnerabilities, some of which may only be discovered after
the code has been released. We rely heavily on a software engineering practice known as “continuous deployment,” meaning that we typically release
software code many times per day. This practice may result in the more frequent introduction of errors or vulnerabilities into the software underlying our
platform. Any errors or vulnerabilities discovered in our code after release could result in damage to our reputation, loss of our community members, loss of
revenue or liability for damages, any of which could adversely affect our growth prospects and our business.
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The software powering our marketplace incorporates software covered by open source licenses. In addition, we regularly contribute source code to open
source software projects and release internal software projects under open source licenses, and we anticipate doing so in the future. The terms of many open
source licenses have not been interpreted by U.S. courts and there is a risk that the licenses could be construed in a manner that imposes unanticipated
conditions or restrictions on our ability to operate our marketplace. Under certain open source licenses, we could be required to publicly release the source
code of our software or to make our software available under open source licenses. To avoid the public release of the affected portions of our source code, we
could be required to expend substantial time and resources to re-engineer some or all of our software. In addition, use of open source software can lead to
greater risks than use of third-party commercial software because open source licensors generally do not provide warranties or controls on the origin of the
software. Use of open source software may also present additional security risks because the public availability of such software may make it easier for
hackers and other third parties to determine how to compromise our platform. Additionally, because any software source code we contribute to open source
projects is publicly available, our ability to protect our intellectual property rights in such software source code may be limited or lost entirely, and we will
be unable to prevent our competitors or others from using such contributed software source code. Any of these risks could be difficult to eliminate or manage
and, if not addressed, could adversely affect our business, financial condition and results of operations.
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The application of indirect taxes, such as sales and use tax, value-added tax, or VAT, provincial taxes, goods and services tax, business tax and gross receipt
tax, to businesses like ours and to Etsy sellers and Etsy buyers is a complex and evolving issue. For example, as of January 1, 2015, the European Union
imposed an obligation on us to collect and remit VAT on sales of automatically-downloaded digital items, and we have implemented such collection and
remittance procedures. Significant judgment is required to evaluate applicable tax obligations and as a result amounts recorded are estimates and could
change. In many cases, the ultimate tax determination is uncertain because it is not clear how existing statutes apply to our business or to Etsy sellers’
businesses. One or more states, the federal government or other countries may seek to impose additional reporting, record-keeping or indirect tax collection
obligations on businesses like ours that facilitate online commerce. For example, the U.S. Congress is currently considering legislation, which would grant
states the authority to require online merchants to collect sales tax on online sales at the time a transaction is completed. New taxes could also require us or
Etsy sellers to incur substantial costs to capture data and collect and remit taxes. If such obligations were imposed, the additional costs associated with tax
collection, remittance and audit requirements could make selling in our marketplace less attractive and more costly for Etsy sellers, which could adversely
affect our business.
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We are subject to taxation in the United States and in numerous other jurisdictions. We record tax expense based on current tax payments and our estimates
of future tax payments, which may include reserves for estimates of probable settlements of tax audits. At any one time, multiple tax years could be subject to
audit by various taxing jurisdictions. As a result, we expect that throughout the year there could be ongoing variability in our quarterly tax rates as taxable
events occur and exposures are re-evaluated. Further, our effective tax rate in a given financial statement period may be adversely impacted by changes in tax
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