Orbitz 2014 Annual Report Download - page 71

ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
71
period. None of the final assessments issued for the taxable years 2012 and 2013 were based on historical transaction data, and
each are still subject to review by the Hawaii Tax Appeal Court. These 2012 and 2013 assessments are in addition to the $58.8
million final assessment for merchant model hotel reservations previously issued by the Hawaii Department of Taxation for
2011 and prior years, more than $30.0 million of which was rejected by the Hawaii Tax Appeal Court.
Assessments or declaratory rulings that are administratively final and subject to judicial review have been issued by
the cities of San Francisco, Los Angeles, and San Diego, California; the city of Denver, Colorado; the counties of Miami-Dade,
Broward and Osceola, Florida; and the Indiana Department of Revenue. These assessments and declaratory rulings range from
$0.2 million to approximately $3.2 million, and total approximately $10.8 million. Trial courts rejected the assessments in San
Francisco, Los Angeles and San Diego, California and Broward County, Florida. The Colorado Court of Appeals reversed the
assessments against the OTCs in the City of Denver case. Collectively, the amounts of the assessments and declaratory rulings
not rejected or reversed (the counties of Osceola and Miami-Dade and the Indiana Department of Revenue) amount to
approximately $2.0 million.
The OTCs, including Orbitz, have prevailed in the large majority of hotel tax cases that have been decided to date,
having obtained favorable judgments in more than two dozen cases. However, there have been certain adverse lower court
decisions against Orbitz and the other OTCs that, if affirmed, could result in significant liability to the Company.
First, in July 2011, related to the City of San Antonio hotel occupancy tax case, the United States District Court for the
Western District of Texas issued its findings of fact and conclusions of law in which it held the defendant OTCs, including
Orbitz, liable for hotel occupancy taxes on markup, fees and breakage revenue, and also imposed penalties and interest. On
April 4, 2013, the court entered judgment against Orbitz in the amount of approximately $4.3 million and post-judgment
motions are still pending. The OTCs, including Orbitz, intend to appeal once the pending motions are ruled upon by the court.
Because we do not believe a loss is probable given the numerous issues that exist on appeal, we have not accrued any liability
related to this case.
Second, in September 2012, the Superior Court of the District of Columbia granted the District’s motion for partial
summary judgment and denied the OTCs’ motion for summary judgment, finding the companies liable for sales tax on hotel
reservations dating back to the inception of the merchant model. Although the court acknowledged that the District had
amended its law in 2011, and that the sales tax law was ambiguous prior to that time, the court nonetheless found the OTCs
liable for merchant model hotel reservations before that date. Because we believe that the court’s finding of liability was the
result of a misapplication of the law, we do not believe a loss is probable relating to the pre-amendment case and have
appealed. Accordingly, we have not accrued any liability relating to the District of Columbia case for the period prior to July
2011. On March 25, 2014, Orbitz paid a judgment of $3.8 million, which represents the sales tax attributable to Orbitz.com’s
hotel reservations through December 31, 2011. This amount is subject to a refund if Orbitz prevails in its appeal. The District of
Columbia Court of Appeals heard oral argument on September 30, 2014. Although the Company expects to prevail on the issue
of whether it is liable for sales tax before July 2011, it is possible that we will not prevail, and if that occurs, the amount of the
judgment that we have not expensed is approximately $3.7 million. Additionally, the District of Columbia has cross-appealed
the Superior Court’s denial of the District’s argument that amounts charged to consumers as a tax recovery charge should have
been included in the Superior Court’s damage calculation. Although we do not believe that Orbitz is likely to be liable for tax
on the tax recovery charge, it is possible that the Court of Appeals could determine that it is, and if that occurs, Orbitz’s
additional liability could exceed $0.95 million.
Third, in January 2013, the Tax Court of Appeals in Hawaii ruled that the OTCs are subject to Hawaii’s general excise
tax. The court also determined that the “splitting provision” contained in the Hawaii general excise tax statute, which limits
application of the tax to only the amounts that travel agents receive for their services, does not apply to the transactions at issue.
On March 19, 2013, the court issued an order in which it also imposed “failure to file” and “failure to pay” penalties on the
OTCs. On August 15, 2013, the Hawaii Tax Appeal court ruled that the OTCs were required to pay interest on penalties, and
entered final judgment disposing of all issues and claims of all parties. On September 11, 2013, the OTCs filed their notice of
appeal. Under Hawaii law, in order to appeal, Orbitz was required to pay the total amount of the final judgment to Hawaii prior
to appealing the court’s order. Accordingly, Orbitz made payments to Hawaii of $16.9 million in April 2013, and approximately
$9.2 million to Hawaii in September 2013. These amounts reflected a determination of Orbitz’s liability for general excise tax
(both on the amounts that it receives for its services and the amounts that the hotels receive for the rental of their rooms),
interest, penalties and interest on penalties through the tax year 2011. Although Orbitz disagrees with the court’s rulings on
general excise tax and has appealed them, we have recorded an expense of $4.2 million in light of the decision. The $4.2
million represents the amount Orbitz estimates it would owe if the court had correctly applied the general excise tax splitting
provision on merchant reservations through December 31, 2012 and a 25% failure to file penalty imposed on that figure. Orbitz