

14.	Commitments and Contingencies

We enter into non-cancelable fixed purchase and service obligations in the ordinary course of business. These arrangements primarily consist of advertising commitments and service contracts. At December 31, 2013, future non-cancelable purchase and service obligations greater than $100,000 and one year were as follows (in thousands):



2014	$	6,448
2015	7,164
2016	5,267
2017	1,758
2018	1,770
Thereafter	4,344
Total obligations	$	26,751

We are a defendant in various lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, except as set forth below, management believes the final outcome of such litigation will not have a material adverse effect on our financial position or results of operations.

Texas Sales and Use Tax Assessments

In July 2008, we purchased a used aircraft (the “2008 Aircraft”) with the intent to immediately lease it to an aircraft charter service under 14 C.F.R. Part 135 (the “2008 Aircraft Purchase”). In connection with the 2008 Aircraft Purchase, we sought and received a letter ruling from the State of Texas Comptroller’s Tax Policy Division (the “Comptroller’s Ruling”). The Comptroller’s Ruling concluded that the 2008 Aircraft Purchase and lease qualified for the “sale for resale” exemption to sales and use taxes. In 2011, we purchased a used aircraft in a transaction that included the trade-in of the 2008 Aircraft with the intent to immediately lease the newly-purchased aircraft to the same aircraft charter service under Part 135 (“the 2011 Aircraft Purchase”). The structure of the 2011 Aircraft Purchase and lease transaction was patterned after the 2008 Aircraft Purchase. In accordance with the Comptroller’s Ruling, we did not pay sales or use tax on either the 2008 Aircraft Purchase or the 2011 Aircraft Purchase.

The Comptroller’s Office has since changed its view as expressed in the Comptroller’s Ruling and is now asserting that the 2008 Aircraft Purchase and the 2011 Aircraft Purchase are subject to sales and use tax. In May 2012, the Comptroller’s Office issued a notification of examination results regarding the 2008 Aircraft Purchase. It has assessed approximately $782,000 in taxes but waived any claim for interest and did not assess any penalty. In a separate matter regarding the 2011 Aircraft Purchase, the Comptroller’s Office issued its notification of examination results in December 2013 and assessed approximately $933,000 in taxes, penalties and interest.

We have filed requests for redetermination disputing both assessments and are seeking hearings concerning them. We believe the assessments are without merit and intend to vigorously contest them. At this time, we are unable to determine the ultimate outcome of these matters. However, in the event the State of Texas succeeds with enforcement of the assessments, we may be required to pay some or all of the assessments, which would reduce net income in the reported period.

Massachusetts Tax Assessment

During the fourth quarter of 2012, we received assessments of approximately $2.5 million, including interest and penalties, related to the alleged underpayment of corporate income taxes to the State of Massachusetts for tax years 2006 through 2008. In 2009, we received similar assessments of approximately $470,000, including interest and penalties, which covered tax years 2003 through 2005. However, in 2013 Massachusetts withdrew its assessment regarding the 2003 to 2005 periods. We believe the remaining assessments are without merit and intend to vigorously contest them. At this time, we are unable to determine the ultimate outcome of this matter. However, in the event the State of Massachusetts succeeds with enforcement of the assessments, we may be required to pay some or all of the assessments, which would reduce net income and could have a material adverse effect on net income in the reported period.

Lumbermens Mutual Casualty Company

In 2003, facing continued capital constraints and a series of downgrades from various rating agencies, our former workers’ compensation insurance carrier for the two-year period ended September 2003, Lumbermens Mutual Casualty Company, formerly known as Kemper (“Lumbermens Mutual”), made the decision to substantially cease underwriting operations and voluntarily entered into “run-off.” In July 2012, Lumbermens Mutual announced that an agreed order of rehabilitation had been entered against it in Cook County, Illinois. Under the order, the Director of the Illinois Department of Insurance was vested with control over Lumbermens Mutual property and decision-making. In an order effective May 10, 2013, the Circuit Court of Cook County, Illinois, found that Lumbermens Mutual was insolvent and ordered its liquidation.

The entry of a liquidation order triggered the transition of claim handling responsibilities for Lumbermens Mutual’s open claims to state guaranty associations around the country. Guaranty associations are non-profit organizations created by statute for the purpose of protecting policyholders from severe financial losses and preventing delays in claim payments due to the insolvency of an insurer. They do this by assuming responsibility for the payment of claims that would otherwise have been paid by the insurer had it not become insolvent. Each state has one or more guaranty association(s), with each association handling certain types of insurance. Insurance companies are required to be members of the state guaranty association as a condition of being licensed to do business in the state.

The guaranty associations in some states, including Texas, may assert that state law allows them to recover the amount of benefits paid by the guaranty association along with associated administration and defense costs from an insured with a net worth exceeding certain specified levels or based upon certain other theories of recovery. We intend to vigorously assert our available defenses to any claims made by any guaranty association. We estimate the outstanding amounts that may be subject to claims from state guaranty associations to range from $1.0 million to $2.0 million as of December 31, 2013. In the event state guaranty associations are successful in seeking recovery from us, we would be required to pay such claims and record liabilities for anticipated future claims, which could have an adverse effect on net income in the reported period.

Pennsylvania Sales Taxes

Pennsylvania imposes a sales tax on “help supply services.” The Pennsylvania Department of Revenue (“Department”) had maintained that PEO services constitute help supply services and are subject to the tax. On February 21, 2012, the Pennsylvania Supreme Court affirmed the Appeals Court decision in the matter titled All Staffing vs. Commonwealth of Pennsylvania, which ruled that PEO services are not subject to the Pennsylvania sales tax.

For the period January 1, 2010, through September 30, 2011, we accrued approximately $2.5 million in Pennsylvania sales tax. As we believed our PEO services were not subject to the sales tax, we reduced our accrual for such amounts in the fourth quarter of 2011.

In 2010, we filed refund claims totaling $2.9 million with the Department for the sales taxes paid in error for the period April 1, 2007 through December 31, 2009. In the second quarter of 2012, the Pennsylvania Board of Finance and Revenue approved our refund claims, and we recognized a $2.9 million receivable and a corresponding reduction to payroll tax expense, a component of direct costs. During the third quarter of 2012, we received the $2.9 million refund.

California Unemployment Taxes

As a result of a 2001 corporate restructuring, we filed for a transfer of our state unemployment tax reserve account with the Employment Development Department of the State of California (“EDD”). The EDD approved our request for transfer of the reserve account in May 2002 and also notified us of our new contribution rates based upon the approved transfer. In December 2003, we received a Notice of Duplicate Accounts and Notification of Assessment (“Notice”) from the EDD. The Notice stated that the EDD was collapsing the accounts of our subsidiaries into the account of the entity with the highest unemployment tax rate. The Notice also retroactively imposed the higher unemployment insurance rate on all of our California employees for 2003, resulting in an assessment of $5.6 million. In January 2004, we filed petitions with an administrative law judge of the California Unemployment Insurance Appeals Board (“ALJ”) to protest the validity of the Notice, asserting several procedural and substantive defenses.

One procedural defense included in our appeal asserts that the EDD failed to meet the statutory requirement related to serving a proper notice within the stipulated time frame and that all of the statutes of limitations concerning the EDD’s ability to reassess or modify unemployment tax rates for the periods addressed in the Notice had expired (“Notification Defense”). During 2010, a California Circuit Court issued a ruling in favor of the EDD regarding a dispute involving a taxpayer who made arguments similar to our Notification Defense. The Supreme Court of California subsequently denied the taxpayer’s petition for review. We subsequently received a statement of account from the EDD indicating taxes, penalties and interest due of approximately $8.1 million.

While still denying all liability, we entered into a written agreement with the EDD in September 2011 to fully and finally settle this dispute (the “Settlement Agreement”). Pursuant to the terms of the Settlement Agreement, we agreed to pay $3.1 million (the “Settlement Amount”) to the EDD. The Settlement Amount of $3.1 million was paid and recorded in other income (expense) during the year ended December 31, 2011.