Note 8— Taxes

Income Taxes

Income before income taxes is comprised of the following:



	2019		2018		2017
Domestic	$	3,591	$	3,182	$	2,988
Foreign	1,174		1,260		1,051
Total	$	4,765	$	4,442	$	4,039

The provisions for income taxes are as follows:



	2019			2018			2017
Federal:
Current	$	328		$	636		$	802
Deferred	222			(35		)	7
Total federal	550			601			809
State:
Current	178			190			161
Deferred	26			22			8
Total state	204			212			169
Foreign:
Current	405			487			389
Deferred	(98		)	(37		)	(42		)
Total foreign	307			450			347
Total provision for income taxes	$	1,061		$	1,263		$	1,325

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 became effective for 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 2018 and throughout 2019 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% was effective for all of 2019 and resulted in a blended rate for the Company of 25.6% for 2018.

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



	2019					2018					2017
Federal taxes at statutory rate	$	1,001		21.0	%	$	1,136		25.6	%	$	1,414		35.0	%
State taxes, net	171			3.6		154			3.4		116			2.9
Foreign taxes, net	(1		)	0.0		32			0.7		(64		)	(1.6	)
Employee stock ownership plan (ESOP)	(18		)	(0.4	)	(14		)	(0.3	)	(104		)	(2.6	)
2017 Tax Act	(123		)	(2.6	)	19			0.4		—			—
Other	31			0.7		(64		)	(1.4	)	(37		)	(0.9	)
Total	$	1,061		22.3	%	$	1,263		28.4	%	$	1,325		32.8	%

During 2019, the Company recognized net tax benefits of $123 related to the 2017 Tax Act. This benefit primarily included $105 related to U.S. taxation of deemed foreign dividends, partially offset by losses of current year foreign tax credits. During 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 remeasurement of certain deferred tax liabilities.

In 2019 and 2018, the Company recognized total net tax benefits of $221 and $57, which included a benefit of $59 and $33, respectively, related to the stock-based compensation accounting standard adopted in 2018 in addition to the impacts of the 2017 Tax Act noted above. In 2017, the Company’s provision for income taxes was favorably impacted by a net tax benefit of $104, primarily due to the $82 tax benefit recorded in connection with the May 2017 special cash dividends paid by the Company to employees through the Company's 401(k) retirement plan. Dividends on these shares are deductible for U.S. income tax purposes. There was no similar special cash dividend in 2019 or 2018.

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



	2019			2018
Deferred tax assets:
Equity compensation	$	74		$	72
Deferred income/membership fees	180			136
Foreign tax credit carry forward	65			—
Accrued liabilities and reserves	566			484
Total deferred tax assets	885			692
Valuation allowance	(76		)	—
Total net deferred tax assets	809			692
Deferred tax liabilities:
Property and equipment	(677		)	(478		)
Merchandise inventories	(187		)	(175		)
Foreign branch deferreds	(69		)	—
Other	(21		)	(40		)
Total deferred tax liabilities	$	(954	)	$	(693	)
Net deferred tax (liabilities)/assets	$	(145	)	$	(1	)

The deferred tax accounts at the end of 2019 and 2018 include deferred income tax assets of $398 and $316, respectively, included in other assets; and deferred income tax liabilities of $543 and $317, respectively, included in other liabilities.

In 2019, the Company recorded a valuation allowance of $76 primarily related to foreign tax credits that we believe will not be realized due to limitations on the Company's ability to claim the credits during the carry forward period. The foreign tax credit carry forwards are set to expire beginning in fiscal 2027.

The Company no longer considers fiscal year earnings of our non-U.S. consolidated subsidiaries after 2017 to be indefinitely reinvested and has recorded the estimated incremental foreign withholding (net of available foreign tax credits) on 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 2018, which totaled $2,924, 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 2019 and 2018 is as follows:



	2019			2018
Gross unrecognized tax benefit at beginning of year	$	36		$	52
Gross increases—current year tax positions	5			6
Gross increases—tax positions in prior years	2			6
Gross decreases—tax positions in prior years	0			(17		)
Settlements	(4		)	(1		)
Lapse of statute of limitations	(12		)	(10		)
Gross unrecognized tax benefit at end of year	$	27		$	36

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 2019 and 2018, 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 $24 and $32 at the end of 2019 and 2018, respectively.

Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. Interest and penalties recognized during 2019 and 2018 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.

Other Taxes

The Company is undergoing multiple examinations for value added, sales-based, payroll, product, import or other non-income taxes in various jurisdictions. In certain cases, the Company has received assessments from the authorities. Subsequent to the end of 2019, the Company received an assessment related to a product tax audit covering multiple years. The Company recorded a charge of $123 in 2019, but plans to protest the assessment. Other possible losses or range of possible losses associated with these matters are either immaterial or an estimate of the possible loss or range of loss cannot be made at this time. If certain matters or a group of matters were to be decided adversely to the Company, it could result in a charge that might be material to the results of an individual fiscal quarter or year.