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INCOME TAXES | 12 Months Ended
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Dec. 31, 2012
INCOME TAXES |
INCOME TAXES | 13. INCOME TAXES Components of the provision for income taxes are as follows:
|  | Year Ended December 31,
|  | 2012 |  | 2011 |  | 2010
Current: |  |  |  |  |  |
Federal |  | $ | 177,372 |  | $ | 146,385 |  | $ | 111,217
State |  | 30,268 |  | 22,526 |  | 27,139
Foreign |  | 3,951 |  | 2,827 |  | 279
|  | 211,591 |  | 171,738 |  | 138,635
Deferred: |  |  |  |  |  |
Federal |  | (743) |  | 634 |  | (3,913)
State |  | (483) |  | 465 |  | 747
Foreign |  | (7,373) |  | (3,583) |  | (1,573)
|  | (8,599) |  | (2,484) |  | (4,739)
Valuation allowance |  | 6,142 |  | 1,797 |  | 3,377
|  | $ | 209,134 |  | $ | 171,051 |  | $ | 137,273
The differences in the total provision for income taxes that would result from applying the 35% federal statutory rate to income before provision for income taxes and the reported provision for income taxes are as follows:
|  | Year Ended December 31, |
|  | 2012 |  | 2011 |  | 2010 |
U.S. Federal tax expense at statutory rates |  | $ | 192,204 |  | $ | 160,045 |  | $ | 122,256 |
State income taxes, net of federal tax benefit |  | 20,252 |  | 14,917 |  | 18,126 |
Permanent differences |  | 5,968 |  | 1,176 |  | 1,634 |
Domestic production deduction |  | (15,469) |  | (11,551) |  | (9,450) |
Other |  | 37 |  | 4,667 |  | 1,330 |
Valuation allowance |  | 6,142 |  | 1,797 |  | 3,377 |
|  | $ | 209,134 |  | $ | 171,051 |  | $ | 137,273 |
Major components of the Company’s deferred tax assets (liabilities) at December 31 are as follows:
|  | 2012 |  | 2011 |
Deferred Tax Assets: |  |  |  |  |
Reserve for sales returns |  | $ | 145 |  | $ | 186 |
Reserve for doubtful accounts |  | 28 |  | 42 |
Reserve for inventory obsolescence |  | 2,753 |  | 3,082 |
Reserve for marketing development fund |  | 4,595 |  | 4,485 |
Capitalization of inventory costs |  | 1,524 |  | 972 |
State franchise tax |  | 5,268 |  | 4,817 |
Accrued compensation |  | 49 |  | 256 |
Accrued other liabilities |  | 1,825 |  | 487 |
Deferred revenue |  | 49,597 |  | 51,477 |
Stock-based compensation |  | 19,965 |  | 16,605 |
Securities impairment |  | 2,104 |  | 2,402 |
Foreign net operating loss carryforward |  | 13,529 |  | 7,511 |
Prepaid supplies |  | 2,008 |  | 3,159 |
Total gross deferred tax assets |  | $ | 103,390 |  | $ | 95,481 |
Deferred Tax Liabilities: |  |  |  |  |
Amortization of trademarks |  | $ | (9,179) |  | $ | (7,911) |
Unrealized gain on available-for-sale investments |  | (1,006) |  | - |
Amortization of graphic design |  | (81) |  | (52) |
Depreciation |  | (5,304) |  | (7,340) |
Total gross deferred tax liabilities |  | (15,570) |  | (15,303) |
Valuation Allowance |  | (11,316) |  | (5,174) |
Net deferred tax assets |  | $ | 76,504 |  | $ | 75,004 |
During the second fiscal quarter of 2010 and the first and fourth quarters of 2012, the Company established a full valuation allowance against deferred tax assets, resulting from cumulative net operating losses incurred by certain foreign subsidiaries of the Company. The effect of the valuation allowance and its related impact on the Company’s overall tax rate was to increase the Company’s provision for income taxes by $6.1 million, $1.8 million and $3.4 million for the years ended December 31, 2012, 2011 and 2010, respectively. At December 31, 2012, the Company had net operating loss carryforwards of approximately $74.5 million. Of this amount, $67.2 million may be carried forward indefinitely. The remaining $7.3 million will begin to expire in 2017. The following is a rollforward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the years ended December 31, 2012, 2011 and 2010:
|  | Gross Unrealized Tax Benefits |
Balance at January 1, 2010 |  | $ | 397 |
Additions for tax positions related to the current year |  | - |
Additions for tax positions related to the prior year |  | 68 |
Decreases for tax positions related to prior years |  | - |
Balance at December 31, 2010 |  | $ | 465 |
Additions for tax positions related to the current year |  | - |
Additions for tax positions related to the prior year |  | 1,445 |
Decreases for tax positions related to prior years |  | - |
Balance at December 31, 2011 |  | $ | 1,910 |
Additions for tax positions related to the current year |  | - |
Additions for tax positions related to the prior year |  | 520 |
Decreases for tax positions related to prior years |  | (1,504) |
Balance at December 31, 2012 |  | $ | 926 |
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of December 31, 2012, the Company had accrued approximately $0.3 million in interest and penalties related to unrecognized tax benefits. If the Company were to prevail on all uncertain tax positions it would not have a significant impact on the Company’s effective tax rate. It is expected that the amount of unrecognized tax benefits will not significantly change within the next 12 months. On February 10, 2011, the Internal Revenue Service (“IRS”) began its examination of the Company’s U.S. federal income tax returns for the years ended December 31, 2008 and 2009. The examination was completed in April 2012 with no material adjustments. The Company is also currently under examination by certain state jurisdictions. The Company is subject to U.S. federal income tax as well as to income tax in multiple state and foreign jurisdictions. Federal income tax returns are subject to IRS examination for the 2010 and 2011 tax years. State income tax returns are subject to examination for the 2008 through 2011 tax years.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 + Details
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