Expedia 2014 Annual Report Download - page 58

likelihood of payment is probable and the amounts can be reasonably estimated. The determination for required
liabilities is based upon analysis of each individual tax issue, or legal proceeding, taking into consideration the
likelihood of adverse judgments and the range of possible loss. In addition, our analysis may be based on
discussions with outside legal counsel. The ultimate resolution of these potential tax exposures and legal
proceedings may be greater or less than the liabilities recorded.
Occupancy Tax. Some states and localities impose a transient occupancy or accommodation tax on the use
or occupancy of hotel accommodations. Generally, hotels collect taxes based on the rate paid to the hotel and
remit these taxes to the various tax authorities. When a customer books a room through one of our travel
services, we collect a tax recovery charge from the customer which we pay to the hotel. We calculate the tax
recovery charge by applying the occupancy tax rate supplied to us by the hotels to the amount that the hotel has
agreed to receive for the rental of the room by the consumer. In all but a limited number of jurisdictions, we do
not collect or remit occupancy taxes, nor do we pay occupancy taxes to the hotel operator, on the portion of the
customer payment we retain. Some jurisdictions have questioned our practice in this regard. While the applicable
tax provisions vary among the jurisdictions, we generally believe that we are not required to pay such occupancy
taxes. We are engaged in discussions with tax authorities in various jurisdictions to resolve this issue. Some tax
authorities have brought lawsuits or have levied assessments asserting that we are required to collect and remit
occupancy tax. The ultimate resolution in all jurisdictions cannot be determined at this time. Certain jurisdictions
may require us to pay tax assessments, including occupancy and other transactional tax assessments, prior to
contesting any such assessments.
We have established a reserve for the potential settlement of issues related to hotel occupancy taxes for prior
and current periods, consistent with applicable accounting principles and in light of all current facts and
circumstances. A variety of factors could affect the amount of the liability (both past and future), which factors
include, but are not limited to, the number of, and amount of revenue represented by, jurisdictions that ultimately
assert a claim and prevail in assessing such additional tax or negotiate a settlement and changes in relevant
statutes.
We note that there are more than 7,000 taxing jurisdictions in the United States, and it is not feasible to
analyze the statutes, regulations and judicial and administrative rulings in every jurisdiction. Rather, we have
obtained the advice of state and local tax experts with respect to tax laws of certain states and local jurisdictions
that represent a large portion of our hotel revenue. Many of the statutes and regulations that impose hotel
occupancy taxes were established before the emergence of the internet and e-commerce. Certain jurisdictions
have enacted, and others may enact, legislation regarding the imposition of occupancy taxes on businesses that
arrange the booking of hotel accommodations. We continue to work with the relevant tax authorities and
legislators to clarify our obligations under new and emerging laws and regulations. We will continue to monitor
the issue closely and provide additional disclosure, as well as adjust the level of reserves, as developments
warrant. Additionally, certain of our businesses are involved in occupancy tax related litigation, which is
discussed in Part I, Item 3, Legal Proceedings. Recent occupancy tax developments are also discussed below
under the caption “Occupancy and Other Taxes.”
Stock-Based Compensation
Our primary form of employee stock-based compensation is stock option awards. We measure the value of
stock option awards on the date of grant at fair value using the Black-Scholes option valuation model. We
amortize the fair value, net of estimated forfeitures, over the remaining term on a straight-line basis. The Black-
Scholes model requires various highly judgmental assumptions including volatility and expected option term. If
any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense
may differ materially in the future from that recorded in the current period.
We record stock-based compensation expense net of estimated forfeitures. In determining the estimated
forfeiture rates for stock-based awards, we periodically conduct an assessment of the actual number of equity
awards that have been forfeited to date as well as those expected to be forfeited in the future. We consider many
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