Expedia 2013 Annual Report Download - page 120

Legal Proceedings
In the ordinary course of business, we are a party to various lawsuits. Management does not expect these
lawsuits to have a material impact on the liquidity, results of operations, or financial condition of Expedia. We
also evaluate other potential contingent matters, including value-added tax, federal excise tax, transient
occupancy or accommodation tax and similar matters. We do not believe that the aggregate amount of liability
that could be reasonably possible with respect to these matters would have a material adverse effect on our
financial results; however, litigation is inherently uncertain and the actual losses incurred in the event that our
legal proceedings were to result in unfavorable outcomes could have a material adverse effect on our business
and financial performance.
Litigation Relating to Hotel Occupancy Taxes. Eighty-six lawsuits have been filed by cities, counties and
states involving hotel occupancy taxes. Thirty-five lawsuits are currently active. These lawsuits are in various
stages and we continue to defend against the claims made in them vigorously. With respect to the principal
claims in these matters, we believe that the ordinances at issue do not apply to the services we provide, namely
the facilitation of hotel reservations, and, therefore, that we do not owe the taxes that are claimed to be owed. We
believe that the ordinances at issue generally impose occupancy and other taxes on entities that own, operate or
control hotels (or similar businesses) or furnish or provide hotel rooms or similar accommodations. To date,
thirty-five of these lawsuits have been dismissed. Some of these dismissals have been without prejudice and,
generally, allow the governmental entity or entities to seek administrative remedies prior to pursuing further
litigation. Twenty-one dismissals were based on a finding that we and the other defendants were not subject to
the local hotel occupancy tax ordinance or that the local government lacked standing to pursue their claims. As a
result of this litigation and other attempts by certain jurisdictions to levy such taxes, we have established a
reserve for the potential settlement of issues related to hotel occupancy taxes, consistent with applicable
accounting principles and in light of all current facts and circumstances, in the amount of $46 million as of
December 31, 2013 and $35 million as of December 31, 2012. This reserve is based on our best estimate of
probable losses and the ultimate resolution of these contingencies may be greater or less than the liabilities
recorded. An estimate for a reasonably possible loss or range of loss in excess of the amount reserved cannot be
made. Changes to these settlement reserves are included within legal reserves, occupancy tax and other in the
consolidated statements of operations.
In connection with various occupancy tax audits and assessments, certain jurisdictions may assert that
taxpayers are required to pay any assessed taxes prior to being allowed to contest or litigate the applicability of
the ordinances, which is referred to as “pay-to-play.” These jurisdictions may attempt to require that we pay any
assessed taxes prior to being allowed to contest or litigate the applicability of the tax ordinance. Payment of these
amounts is not an admission that we believe we are subject to such taxes and, even when such payments are
made, we continue to defend our position vigorously. If we prevail in the litigation, for which a pay-to-play
payment was made, the jurisdiction collecting the payment will be required to repay such amounts, plus interest.
During 2009, we expensed $48 million related to monies paid in advance of litigation in occupancy tax
proceedings with the city of San Francisco. The city of San Francisco issued additional assessments of tax,
penalties and interest for the time period from the fourth quarter of 2007 through the fourth quarter of 2011
against the online travel companies, including $24 million against Expedia, Hotels.com and Hotwire. The
additional assessments, including the prepayment of such assessments, have been contested by the online travel
companies. Although the city previously agreed, subject to documentation, that the additional assessments need
not be paid and could be placed under a bond, it now has stated that it will proceed with an administrative
process outside of the pending litigation and seek to collect the additional assessment against the Expedia
companies. Hotels.com is currently under audit by the State of Texas, which imposes a pay-to-play requirement
to challenge an adverse audit result in court.
Litigation Relating to Other Taxes. On January 31, 2011, the online travel companies received final notices
of assessment for general excise taxes for the tax years 2000 to 2011 on their services relating to non-
commissioned hotel room reservations. The online travel companies appealed these assessments to the Hawaii
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