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INCOME TAXES

12 Months Ended

Dec. 31, 2019

16. 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, 2019.

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 Company currently considers the earnings of its foreign entities (excluding Japan) to be permanently reinvested outside the United States based on estimates that future domestic cash generation will be sufficient to meet future domestic cash needs. Accordingly, deferred income taxes have not been recorded for the undistributed earnings of the Company’s foreign subsidiaries excluding Japan. Deferred income taxes have not been recorded for Japan, as any federal, state, or foreign withholding taxes associated with the repatriation of those earnings would be immaterial.

The domestic and foreign components of the Company’s income before provision for income taxes are as follows:


	Year Ended December 31,
	2019		2018		2017
Domestic*	$	1,196,883	$	1,100,487	$	1,062,713
Foreign*		219,079		192,785		138,910
Income before provision for income taxes	$	1,415,962	$	1,293,272	$	1,201,623

*After intercompany royalties, management fees and interest charges from the Company’s domestic to foreign entities of $51.2 million, $40.5 million and $42.5 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Components of the provision for income taxes are as follows:


	Year Ended December 31,
	2019		2018		2017
Current:
Federal	$	212,068	$	209,147	$	243,127
State		39,982		41,934		43,252
Foreign		55,167		42,541		27,522
		307,217		293,622		313,901

Deferred:
Federal		8,320		9,804		61,797
State		(6,878)		1,644		3,062
Foreign		(4,219)		(8,778)		(4,579)
		(2,777)		2,670		60,280

Valuation allowance		3,687		3,976		6,764
	$	308,127	$	300,268	$	380,945

A reconciliation of the total provision for income taxes after applying the U.S. federal statutory rate of 21% for 2019 and 2018 and 35% for 2017 to income before provision for income taxes to the reported provision for income taxes are as follows:


	Year Ended December 31,
	2019		2018		2017
U.S. Federal tax expense at statutory rates	$	297,352	$	271,587	$	420,568
State income taxes, net of federal tax benefit		30,098		36,312		27,569
Permanent differences		(2,128)		3,606		10,356
Stock based compensation		(13,473)		(370)		(79,687)
Domestic production deduction		—		—		(22,229)
Deferred tax asset reduction (Tax Reform Act)		—		—		39,763
Other		(12,423)		(8,438)		3,736
Foreign rate differential		5,014		(6,405)		(25,895)
Valuation allowance		3,687		3,976		6,764
	$	308,127	$	300,268	$	380,945

Major components of the Company’s deferred tax assets (liabilities) at December 31, 2019 and 2018 are as follows:


	2019		2018
Deferred Tax Assets:
Reserve for sales returns	$	140	$	137
Reserve for inventory obsolescence		2,066		2,836
Reserve for marketing development fund		8,469		4,666
Capitalization of inventory costs		2,310		1,210
State franchise tax - current		2,346		2,663
Accrued compensation		1,944		574
Accrued other liabilities		5,674		5,276
Deferred revenue		81,903		87,573
Stock-based compensation		22,665		25,439
Foreign net operating loss carryforward		30,187		28,030
Prepaid supplies		5,799		7,476
Termination payments		69,467		71,918
Operating lease liabilities		6,155		—
Other deferred tax assets		17,615		11,010
Total gross deferred tax assets	$	256,740	$	248,808

Deferred Tax Liabilities:
Amortization of trademarks	$	(35,227)	$	(31,445)
Intangibles		(76,047)		(82,544)
State franchise tax - deferred		(7,173)		(7,093)
Operating lease ROU assets		(6,155)		—
Other deferred tax liabilities		(93)		(99)
Depreciation		(6,765)		(5,123)
Total gross deferred tax liabilities		(131,460)		(126,304)

Valuation Allowance		(40,503)		(36,816)

Net deferred tax assets	$	84,777	$	85,688

During the years ended December 31, 2019, 2018 and 2017, 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 $3.7 million, $4.0 million and $6.8 million for the years ended December 31, 2019, 2018 and 2017, respectively. At December 31, 2019, the Company had net operating loss carryforwards of approximately $112.4 million. Of this amount, $77.5 million may be carried forward indefinitely. The remaining $34.8 million of net operating loss carryforwards will begin to expire in 2020.

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, 2019, 2018 and 2017:


	Gross Unrecognized Tax
	Benefits
Balance at January 1, 2017	$	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
Additions for tax positions related to the current year		—
Additions for tax positions related to the prior year		1,833
Decreases for tax positions related to prior years		(3,875)
Balance at December 31, 2019	$	2,993

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, 2019, the Company had accrued approximately $0.4 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. Both examinations were completed in November 2019 with no material adjustments.

The Company is in various stages of examination with certain states and certain foreign jurisdictions including the United Kingdom and Ireland. The Company’s 2016 through 2018 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 2014 through 2018 tax years.