COMMITMENTS AND CONTINGENCIES

Commitments

We have entered into non-cancellable operating, capital, and finance leases for equipment and office, fulfillment, sortation, delivery, data center, physical store, and renewable energy facilities. Rental expense under operating lease agreements was $553 million and $859 million for Q3 2017 and Q3 2018, and $1.4 billion and $2.5 billion for the nine months ended September 30, 2017 and 2018.

The following summarizes our principal contractual commitments, excluding open orders for purchases that support normal operations and are generally cancellable, as of September 30, 2018 (in millions):



	Three Months Ended December 31,		Year Ended December 31,
	2018		2019		2020		2021		2022		Thereafter		Total
Debt principal and interest	$	213	$	2,186	$	2,111	$	1,833	$	2,049	$	31,769	$	40,161
Capital lease obligations, including interest (1)	1,363		6,912		4,753		1,740		583		773		16,124
Finance lease obligations, including interest (2)	145		609		625		636		647		5,654		8,316
Operating leases	748		2,902		2,752		2,468		2,200		13,453		24,523
Unconditional purchase obligations (3)	137		3,760		3,488		3,265		3,054		8,096		21,800
Other commitments (4) (5)	841		1,734		1,157		1,184		649		7,936		13,501
Total commitments	$	3,447	$	18,103	$	14,886	$	11,126	$	9,182	$	67,681	$	124,425

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(1)	Excluding interest, current capital lease obligations of $5.8 billion and $6.9 billion are recorded within “Accrued expenses and other” as of December 31, 2017 and September 30, 2018, and $8.4 billion and $8.7 billion are recorded within “Other long-term liabilities” as of December 31, 2017 and September 30, 2018.


(2)	Excluding interest, current finance lease obligations of $282 million and $391 million are recorded within “Accrued expenses and other” as of December 31, 2017 and September 30, 2018, and $4.7 billion and $6.5 billion are recorded within “Other long-term liabilities” as of December 31, 2017 and September 30, 2018.

(3)

Includes unconditional purchase obligations related to certain products offered in our Whole Foods Market stores and long-term agreements to acquire and license digital media content that are not reflected on the consolidated balance sheets. For those digital media content agreements with variable terms, we do not estimate the total obligation beyond any minimum quantities and/or pricing as of the reporting date. Purchase obligations associated with renewal provisions solely at the option of the content provider are included to the extent such commitments are fixed or a minimum amount is specified.


(4)	Includes the estimated timing and amounts of payments for rent and tenant improvements associated with build-to-suit lease arrangements and equipment lease arrangements that have not been placed in service and digital media content liabilities associated with long-term digital media content assets with initial terms greater than one year.


(5)	Excludes approximately $3.4 billion of accrued tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period of payment, if any.

Pledged Assets

As of December 31, 2017 and September 30, 2018, we have pledged or otherwise restricted $1.4 billion and $688 million of our cash, cash equivalents, and marketable securities, and certain property and equipment as collateral for real estate leases, amounts due to third-party sellers in certain jurisdictions, debt, and standby and trade letters of credit.

Other Contingencies

In 2016, we determined that we processed and delivered orders of consumer products for certain individuals and entities located outside Iran covered by the Iran Threat Reduction and Syria Human Rights Act or other United States sanctions and export control laws. The consumer products included books, music, other media, apparel, home and kitchen, health and beauty, jewelry, office, consumer electronics, software, lawn and patio, grocery, and automotive products. Our review is ongoing and we have voluntarily reported these orders to the United States Treasury Department’s Office of Foreign Assets Control and the United States Department of Commerce’s Bureau of Industry and Security. We intend to cooperate fully with OFAC and BIS with respect to their review, which may result in the imposition of penalties. For additional information, see Item 5 of Part II, “Other Information — Disclosure Pursuant to Section 13(r) of the Exchange Act.”

We are subject to claims related to various indirect taxes (such as sales, value added, consumption, service, and similar taxes), including in jurisdictions in which we already collect and remit such taxes. If the relevant taxing authorities were successfully to pursue these claims, we could be subject to significant additional tax liabilities. For example, in June 2017, the State of South Carolina issued an assessment for uncollected sales and use taxes for the period from January 2016 to March 2016, including interest and penalties. South Carolina is alleging that we should have collected sales and use taxes on transactions by our third-party sellers. We believe the assessment is without merit. If South Carolina or other states were successfully to seek additional adjustments of a similar nature, we could be subject to significant additional tax liabilities. We intend to defend ourselves vigorously in this matter.

Legal Proceedings

The Company is involved from time to time in claims, proceedings, and litigation, including the matters described in Item 8 of Part II, “Financial Statements and Supplementary Data — Note 7 — Commitments and Contingencies — Legal Proceedings” of our 2017 Annual Report on Form 10-K and in Item 1 of Part I, “Financial Statements — Note 3 — Commitments and Contingencies — Legal Proceedings” of our Quarterly Reports on Form 10-Q for the periods ended March 31, 2018 and June 30, 2018.

The outcomes of our legal proceedings and other contingencies are inherently unpredictable, subject to significant uncertainties, and could be material to our operating results and cash flows for a particular period. In addition, for the matters we disclose that do not include an estimate of the amount of loss or range of losses, such an estimate is not possible or is immaterial, and we may be unable to estimate the possible loss or range of losses that could potentially result from the application of non-monetary remedies.