Note 8—Income Taxes

Income before income taxes is comprised of the following:



	2018		2017		2016
Domestic	$	3,182	$	2,988	$	2,622
Foreign	1,260		1,051		997
Total	$	4,442	$	4,039	$	3,619

The provisions for income taxes are as follows:



	2018			2017			2016
Federal:
Current	$	636		$	802		$	468
Deferred	(35		)	7			233
Total federal	601			809			701
State:
Current	190			161			108
Deferred	22			8			21
Total state	212			169			129
Foreign:
Current	487			389			398
Deferred	(37		)	(42		)	15
Total foreign	450			347			413
Total provision for income taxes	$	1,263		$	1,325		$	1,243

In December 2017, the 2017 Tax Act was signed into law. Except for certain provisions, the 2017 Tax Act is effective for tax years beginning on or after January 1, 2018. The Company is a fiscal-year taxpayer, so most provisions will become effective for fiscal 2019, including limitations on the Company’s ability to claim foreign tax credits, repeal of the domestic manufacturing deduction, and limitations on certain business deductions. Provisions with significant impacts that were effective starting in the second quarter of fiscal 2018 and throughout the remainder of fiscal 2018 included: a decrease in the U.S. federal income tax rate, remeasurement of certain net deferred tax liabilities, and a transition tax on deemed repatriation of certain foreign earnings. The decrease in the U.S. federal statutory income tax rate to 21.0% resulted in a blended rate for the Company of 25.6% for fiscal 2018.

The reconciliation between the statutory tax rate and the effective rate is as follows:



	2018					2017					2016
Federal taxes at statutory rate	$	1,136		25.6	%	$	1,414		35.0	%	$	1,267		35.0	%
State taxes, net	154			3.4		116			2.9		91			2.5
Foreign taxes, net	32			0.7		(64		)	(1.6	)	(21		)	(0.6	)
Employee stock ownership plan (ESOP)	(14		)	(0.3	)	(104		)	(2.6	)	(17		)	(0.5	)
2017 Tax Act	19			0.4		—			—		—			—
Other	(64		)	(1.4	)	(37		)	(0.9	)	(77		)	(2.1	)
Total	$	1,263		28.4	%	$	1,325		32.8	%	$	1,243		34.3	%

During fiscal 2018, the Company recognized a net tax expense of $19 related to the 2017 Tax Act. This expense included $142 for the estimated tax on deemed repatriation of foreign earnings, and $43 for the reduction in foreign tax credits and other immaterial items, largely offset by a tax benefit of $166 for the provisional remeasurement of certain deferred tax liabilities. These items were predominantly recorded in the second quarter as provisional amounts and reflect the Company's current interpretations and estimates that it believes are reasonable. As the Company continues to evaluate the 2017 Tax Act and available data, it anticipates that adjustments may be made in future periods up to and including the second quarter of fiscal 2019 in accordance with Staff Accounting Bulletin 118.

In fiscal 2018, we also recognized net tax benefits of $76, which was largely driven by the adoption of an accounting standard related to stock-based compensation and other immaterial net benefits. In fiscal 2017, the Company’s provision for income taxes was favorably impacted by a net tax benefit of $104, primarily due to tax benefits recorded in connection with the May 2017 special cash dividends paid by the Company to employees through the Company's 401(k) retirement plan of $82. Dividends on these shares are deductible for U.S. income tax purposes. There was no similar special cash dividend in 2018 or 2016.

The components of the deferred tax assets (liabilities) are as follows:



	2018			2017
Equity compensation	$	72		$	109
Deferred income/membership fees	136			167
Accrued liabilities and reserves	484			647
Property and equipment	(478		)	(747		)
Merchandise inventories	(175		)	(252		)
Other⁽¹⁾	(40		)	18
Net deferred tax (liabilities)/assets	$	(1	)	$	(58	)

_______________


(1)	Includes foreign tax credits of $36 for 2017. There were no foreign tax credits in 2018.

The deferred tax accounts at the end of fiscal 2018 and 2017 include deferred income tax assets of $316 and $254, respectively, included in other assets; and deferred income tax liabilities of $317 and $312, respectively, included in other liabilities.

The Company no longer considers current fiscal 2018 and future earnings of our non-U.S. consolidated subsidiaries to be permanently reinvested and has recorded the estimated incremental foreign withholding (net of available foreign tax credits) on current fiscal year earnings and state income taxes payable assuming a hypothetical repatriation to the U.S. The Company continues to consider undistributed earnings of certain non-U.S. consolidated subsidiaries prior to fiscal 2018, which totaled $3,071, to be indefinitely reinvested and has not provided for withholding or state taxes.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2018 and 2017 is as follows:



	2018			2017
Gross unrecognized tax benefit at beginning of year	$	52		$	52
Gross increases—current year tax positions	6			3
Gross increases—tax positions in prior years	6			17
Gross decreases—tax positions in prior years	(17		)	0
Settlements	(1		)	(11		)
Lapse of statute of limitations	(10		)	(9		)
Gross unrecognized tax benefit at end of year	$	36		$	52

The gross unrecognized tax benefit includes tax positions for which the ultimate deductibility is highly certain but there is uncertainty about the timing of such deductibility. At the end of 2018 and 2017, these amounts were immaterial. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority. The total amount of such unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods is $32 and $29 at the end of 2018 and 2017, respectively.

Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. Interest and penalties recognized during 2018 and 2017 and accrued at the end of each respective period were not material.

The Company is currently under audit by several jurisdictions in the United States and in several foreign countries. Some audits may conclude in the next 12 months and the unrecognized tax benefits recorded in relation to the audits may differ from actual settlement amounts. It is not practical to estimate the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next 12 months.

The Company files income tax returns in the United States, various state and local jurisdictions, in Canada, and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local examination for years before fiscal 2014. The Company is currently subject to examination in California for fiscal years 2007 to present. No other examinations are believed to be material.