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INCOME TAXES | 12 Months Ended
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Dec. 31, 2018
INCOME TAXES |
INCOME TAXES | 15. INCOME TAXES On December 22, 2017, the President of the United States signed into law the Tax Reform Act. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. A company may select between one of three scenarios to determine a reasonable estimate for certain income tax effects arising from the Tax Reform Act. Those scenarios are (i) a final estimate which effectively closes the measurement window; (ii) a reasonable estimate leaving the measurement window open for future revisions; and (iii) no estimate as the law is still being analyzed. The Company was able to provide a reasonable estimate for the revaluation of deferred taxes and the effects of the toll charge on undistributed foreign subsidiary earnings and profits (“E&P”). As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its net deferred tax assets at December 31, 2017, resulting in a provisional $39.8 million charge included in the provision for income taxes for the year ended December 31, 2017. The Tax Reform Act also provided for a one-time deemed mandatory repatriation of post-1986 E&P through the year ended December 31, 2017. As a result, the Company recognized a provisional $2.1 million charge in the provision for income taxes for the year ended December 31, 2017 related to such deemed mandatory repatriation. The Company completed its analysis of the Tax Reform Act during 2018 and adjusted the 2017 provisional estimate to the final amounts in accordance with Staff Accounting Bulletin No. 118. The measurement window begins in the reporting period that includes the enactment date and ends when an entity has obtained, prepared and analyzed the information needed in order to complete the accounting requirements under ASC 740. For the year ended December 31, 2018, the Company made an adjustment to the provisional amount and recognized an additional $1.8 million provision for income tax related to the deemed mandatory repatriation. The Company has not made additional measurement window adjustments to these items during the year ended December 31, 2018. The Company evaluated the various provisions of the Tax Reform Act, including, the global intangible low-taxed income (“GILTI”) and the foreign derived intangible income provisions. The Company will treat any U.S. tax on foreign earnings under GILTI as a current period expense when incurred. The domestic and foreign components of the Company’s income before provision for income taxes are as follows:
|  | Year Ended December 31,
|  | 2018 |  | 2017 |  | 2016
Domestic* |  | $ | 1,100,487 |  | $ | 1,062,713 |  | $ | 1,029,763
Foreign* |  |  | 192,785 |  |  | 138,910 |  |  | 49,922
Income before provision for income taxes |  | $ | 1,293,272 |  | $ | 1,201,623 |  | $ | 1,079,685
*After intercompany royalties, management fees and interest charges from the Company’s domestic to foreign entities of $40.5 million, $42.5 million and $25.6 million for the years ended December 31, 2018, 2017 and 2016, respectively. Components of the provision for income taxes are as follows:
|  | Year Ended December 31,
|  | 2018 |  | 2017 |  | 2016
Current: |  |  |  |  |  |  |  |  |
Federal |  | $ | 209,147 |  | $ | 243,127 |  | $ | 212,283
State |  |  | 41,934 |  |  | 43,252 |  |  | 35,756
Foreign |  |  | 42,541 |  |  | 27,522 |  |  | 17,171
|  |  | 293,622 |  |  | 313,901 |  |  | 265,210
Deferred: |  |  |  |  |  |  |  |  |
Federal |  |  | 9,804 |  |  | 61,797 |  |  | 87,360
State |  |  | 1,644 |  |  | 3,062 |  |  | 15,254
Foreign |  |  | (8,778) |  |  | (4,579) |  |  | (9,709)
|  |  | 2,670 |  |  | 60,280 |  |  | 92,905
Valuation allowance |  |  | 3,976 |  |  | 6,764 |  |  | 8,885
|  | $ | 300,268 |  | $ | 380,945 |  | $ | 367,000
A reconciliation of the total provision for income taxes after applying the U.S. federal statutory rate of 21% for 2018 and 35% for 2017 and 2016 to income before provision for income taxes to the reported provision for income taxes are as follows:
|  | Year Ended December 31,
|  | 2018 |  | 2017 |  | 2016
U.S. Federal tax expense at statutory rates |  | $ | 271,587 |  | $ | 420,568 |  | $ | 377,599
State income taxes, net of federal tax benefit |  |  | 36,312 |  |  | 27,569 |  |  | 33,148
Permanent differences |  |  | 3,606 |  |  | 10,356 |  |  | 954
Stock based compensation |  |  | (370) |  |  | (79,687) |  |  | (13,654)
Domestic production deduction |  |  | — |  |  | (22,229) |  |  | (21,447)
Deferred tax asset reduction (Tax Reform Act) |  |  | — |  |  | 39,763 |  |  | —
Other |  |  | (8,438) |  |  | 3,736 |  |  | (8,765)
Foreign rate differential |  |  | (6,405) |  |  | (25,895) |  |  | (9,720)
Valuation allowance |  |  | 3,976 |  |  | 6,764 |  |  | 8,885
|  | $ | 300,268 |  | $ | 380,945 |  | $ | 367,000
Major components of the Company’s deferred tax assets (liabilities) at December 31, 2018 and 2017 are as follows:
|  | 2018 |  | 2017
Deferred Tax Assets: |  |  |  |  |  |
Reserve for sales returns |  | $ | 137 |  | $ | 159
Reserve for inventory obsolescence |  |  | 2,836 |  |  | 522
Reserve for marketing development fund |  |  | 4,666 |  |  | 6,360
Capitalization of inventory costs |  |  | 1,210 |  |  | 1,598
State franchise tax - current |  |  | 2,663 |  |  | 2,050
Accrued compensation |  |  | 574 |  |  | 1,473
Accrued other liabilities |  |  | 5,276 |  |  | 3,917
Deferred revenue |  |  | 87,573 |  |  | 93,321
Stock-based compensation |  |  | 25,439 |  |  | 21,119
Foreign net operating loss carryforward |  |  | 28,030 |  |  | 28,965
Prepaid supplies |  |  | 7,476 |  |  | 7,273
Termination payments |  |  | 71,918 |  |  | 70,637
Gain on intercompany transfer |  |  | — |  |  | 6,793
Other deferred tax assets |  |  | 11,010 |  |  | 3,449
Total gross deferred tax assets |  | $ | 248,808 |  | $ | 247,636
Deferred Tax Liabilities: |  |  |  |  |  |
Amortization of trademarks |  | $ | (31,445) |  | $ | (21,657)
Intangibles |  |  | (82,544) |  |  | (84,867)
State franchise tax - deferred |  |  | (7,093) |  |  | (7,617)
Other deferred tax liabilities |  |  | (99) |  |  | (62)
Depreciation |  |  | (5,123) |  |  | (8,260)
Total gross deferred tax liabilities |  |  | (126,304) |  |  | (122,463)
Valuation Allowance |  |  | (36,816) |  |  | (32,840)
Net deferred tax assets |  | $ | 85,688 |  | $ | 92,333
During the years ended December 31, 2018, 2017 and 2016, the Company established full valuation allowances against certain deferred tax assets, resulting from cumulative net operating losses incurred by certain foreign subsidiaries of the Company. The effect of the valuation allowances and the subsequent related impact on the Company’s overall tax rate was to increase the Company’s provision for income taxes by $4.0 million, $6.8 million and $8.9 million for the years ended December 31, 2018, 2017 and 2016, respectively. At December 31, 2018, the Company had net operating loss carryforwards of approximately $102.6 million. Of this amount, $74.7 million may be carried forward indefinitely. The remaining $27.9 million of net operating loss carryforwards will begin to expire in 2019. The following is a roll-forward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the years ended December 31, 2018, 2017 and 2016:
|  | Gross Unrealized Tax
|  | Benefits
Balance at January 1, 2016 |  | $ | 471
Additions for tax positions related to the current year |  |  | —
Additions for tax positions related to the prior year |  |  | —
Decreases for tax positions related to prior years |  |  | (462)
Balance at December 31, 2016 |  | $ | 9
Additions for tax positions related to the current year |  |  | —
Additions for tax positions related to the prior year |  |  | 6,540
Decreases for tax positions related to prior years |  |  | (9)
Balance at December 31, 2017 |  | $ | 6,540
Additions for tax positions related to the current year |  |  | —
Additions for tax positions related to the prior year |  |  | 1,159
Decreases for tax positions related to prior years |  |  | (2,664)
Balance at December 31, 2018 |  | $ | 5,035
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s consolidated financial statements. As of December 31, 2018, the Company had accrued approximately $0.9 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 benefit change within the next 12 months will not be significant. The Company is subject to U.S. federal income tax as well as to income tax in multiple state and foreign jurisdictions. On October 18, 2016, the IRS began its examination of the Company’s U.S. federal income tax return for the year ended December 31, 2014. On March 27, 2017, the IRS began its examination of the Company’s U.S. federal income tax return for the year ended December 31, 2015. The Company is in various stages of examination with certain states and certain foreign jurisdictions. The Company’s 2014 through 2017 U.S. federal income tax returns are subject to examination by the IRS. The Company’s state income tax returns are subject to examination for the 2013 through 2017 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 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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