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INCOME TAXES

12 Months Ended

Dec. 31, 2020

16. INCOME TAXES

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,
	2020		2019		2018
Domestic*	$	1,374,402	$	1,196,883	$	1,100,487
Foreign*		251,755		219,079		192,785
Income before provision for income taxes	$	1,626,157	$	1,415,962	$	1,293,272

*After intercompany royalties, management fees and interest charges from the Company’s domestic to foreign entities of $54.2 million, $51.2 million and $40.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Components of the provision for income taxes are as follows:


	Year Ended December 31,
	2020		2019		2018
Current:
Federal	$	259,073	$	212,068	$	209,147
State		43,704		39,982		41,934
Foreign		70,658		55,167		42,541
		373,435		307,217		293,622

Deferred:
Federal		11,401		8,320		9,804
State		4,709		(6,878)		1,644
Foreign		(167,595)		(4,219)		(8,778)
		(151,485)		(2,777)		2,670

Valuation allowance		(5,387)		3,687		3,976
	$	216,563	$	308,127	$	300,268

A reconciliation of the total provision for income taxes after applying the U.S. federal statutory rate of 21% to income before provision for income taxes to the reported provision for income taxes are as follows for the years ended:


	Year Ended December 31,
	2020		2019		2018
U.S. Federal tax expense at statutory rates	$	341,493	$	297,352	$	271,587
State income taxes, net of federal tax benefit		37,478		30,098		36,312
Permanent differences		(1,064)		(2,128)		3,606
Stock based compensation		1,097		(13,473)		(370)
Intra-company transfer benefit		(165,075)		—		—
Other		(7,388)		(12,423)		(8,438)
Foreign rate differential		15,409		5,014		(6,405)
Valuation allowance		(5,387)		3,687		3,976
	$	216,563	$	308,127	$	300,268

Major components of the Company’s deferred tax assets (liabilities) at December 31, 2020 and 2019 are as follows:


	2020		2019
Deferred Tax Assets:
Reserve for sales returns	$	275	$	140
Reserve for inventory obsolescence		2,366		2,066
Reserve for marketing development fund		9,629		8,469
Capitalization of inventory costs		3,365		2,310
State franchise tax - current		4,229		2,346
Accrued compensation		1,284		1,944
Accrued other liabilities		7,464		5,674
Deferred revenue		75,592		81,903
Stock-based compensation		23,370		22,665
Foreign net operating loss carryforward		21,626		30,187
Prepaid supplies		5,551		5,799
Termination payments		63,009		69,467
Operating lease liabilities		4,434		6,155
Intangibles		87,687		—
Impairment-trademarks and others		2,055		—
Other deferred tax assets		27,164		17,615
Total gross deferred tax assets	$	339,100	$	256,740

Deferred Tax Liabilities:
Amortization of trademarks	$	(42,161)	$	(35,227)
Intangibles		—		(76,047)
State franchise tax - deferred		(6,318)		(7,173)
Operating lease ROU assets		(4,434)		(6,155)
Other deferred tax liabilities		(58)		(93)
Depreciation		(9,363)		(6,765)
Total gross deferred tax liabilities		(62,334)		(131,460)

Valuation Allowance		(35,116)		(40,503)

Net deferred tax assets	$	241,650	$	84,777

During the years ended December 31, 2020, 2019 and 2018, 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 decrease the Company’s provision for income taxes by $5.4 million for the year ended December 31, 2020, and increase $3.7 million and $4.0 million for the years ended December 31, 2019 and 2018, respectively. At December 31, 2020, the Company had net operating loss carryforwards of approximately $84.5 million. Of this amount, $52.4 million may be carried forward indefinitely. The remaining $32.1 million of net operating loss carryforwards will begin to expire in 2021.

In October 2020, the Company completed an intra-entity transfer of intangible assets between certain of the Company’s foreign subsidiaries to better align its international structure with its expanding operations. The transfer resulted in a step-up of the tax-deductible basis in the transferred assets in a foreign jurisdiction, and created a temporary difference between the tax basis and book basis for such intangible assets. The Company recognized deferred tax assets of approximately $165.1 million, with a corresponding reduction to the provision for income taxes during the fourth quarter of 2020 in its consolidated financial statements. The tax deductions for the amortization of the deferred tax assets will be recognized in the future and any amortization not deducted for tax purposes will be carried forward indefinitely. The tax impact on the foreign subsidiary transferor was not material.

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, 2020, 2019 and 2018:


	Gross Unrecognized Tax
	Benefits
Balance at January 1, 2018	$	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
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		(2,251)
Balance at December 31, 2020	$	742

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, 2020, the Company had accrued approximately $0.1 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 any change in 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.

The Company is in various stages of examination with certain states and certain foreign jurisdictions, including the United Kingdom and Ireland. The Company’s 2017 through 2019 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 2016 through 2019 tax years.