Income Taxes

12 Months Ended

Feb. 03, 2019

Note D: Income Taxes

The 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. Among other things, the Tax Act reduced the corporate income tax rate to

21.0%

as of January 1, 2018, introduced a new tax on global intangible low-taxed income (“GILTI”), and implemented a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries.

Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the SEC in December 2017 provided us up to one year to finalize our measurement of the income tax effects of the 2017 Tax Cuts and Jobs Act (“the Tax Act”) on our fiscal year ended January 28, 2018. As of January 28, 2018, we had made reasonable estimates of the income tax effects of the Tax Act, including the transition tax under Internal Revenue Code section 965.

As of February 3, 2019, we have completed the accounting for the income tax effects of the Tax Act based on our current interpretation of available notices and regulations issued and proposed by the U.S. Department of the Treasury and the Internal Revenue Service. As a result, during fiscal 2018, we recorded an immaterial adjustment to the fiscal 2017 provisional transition tax amount. In addition, during fiscal 2018, we booked a net tax benefit of approximately $10,576,000 from the re-measurement of our deferred tax assets.

The components of earnings before income taxes, by tax jurisdiction, are as follows:

In thousands	Fiscal 2018 (53 Weeks)		Fiscal 2017 (52 Weeks)		Fiscal 2016 (52 Weeks)
United States	$	333,594	$	379,000	$	425,517
Foreign		95,653		73,439		46,394
Total earnings before income taxes	$	429,247	$	452,439	$	471,911

The provision for income taxes consists of the following:

In thousands	Fiscal 2018 (53 Weeks)			Fiscal 2017 (52 Weeks)		Fiscal 2016 (52 Weeks)
Current
Federal	$	43,745		$	97,202	$	125,760
State		15,357			19,552		26,197
Foreign		12,822			12,759		7,453
Total current		71,924			129,513		159,410
Deferred
Federal		23,507			62,893		8,307
State		1,562			460		(807	)
Foreign		(1,430	)		28		(386	)
Total deferred		23,639			63,381		7,114
Total provision	$	95,563		$	192,894	$	166,524

We have historically elected not to provide for U.S. income taxes with respect to the undistributed earnings of our foreign subsidiaries as we intended to utilize those earnings in our foreign operations for an indefinite period of time. Under Internal Revenue Code section 965 of the Tax Act, we are deemed to have distributed all the post-1986 earnings of our foreign subsidiaries to the U.S. as of December 31, 2017. In light of the Tax Act, we re-evaluated our permanent reinvestment assertion with respect to unremitted foreign earnings, and we are now only permanently reinvested with respect to our foreign earnings in Canada beginning in fiscal 2018. As a result, we recorded approximately $1,493,000 of foreign withholding tax and additional state income tax in fiscal 2018. As of February 3, 2019, the post-fiscal 2017 earnings of our Canadian subsidiary are permanently reinvested. If we did not consider these earnings to be permanently reinvested, the deferred tax liability would have been immaterial as of February 3, 2019.

In fiscal 2018, we are subject to several provisions of the Tax Act, including GILTI, the base erosion anti-abuse tax and a deduction for foreign-derived intangible income. The company has elected to account for GILTI as a periodic expense when the tax arises. The net impact due to these provisions was immaterial in fiscal 2018.

A reconciliation of income taxes at the federal statutory corporate rate to the effective rate is as follows:

	Fiscal 2018 (53 Weeks)			Fiscal 2017 (52 Weeks)			Fiscal 2016 (52 Weeks)
Federal income taxes at the statutory rate		21.0	%		33.9	%		35.0	%
Re-measurement of deferred tax assets and liabilities		(2.2	%)		6.7	%		—
Transition tax		(0.6	%)		2.9	%		—
State income tax rate		3.8	%		2.5	%		3.5	%
Change in uncertain tax positions		4.1	%		(1.6	%)		2.8	%
Rate differential		(2.3	%)		(2.9	%)		(5.7	%)
Research and development credits		(2.1	%)		—			—
Other		0.6	%		1.1	%		(0.3	%)
Effective tax rate		22.3	%		42.6	%		35.3	%

Significant components of our deferred income tax accounts are as follows:

Deferred tax assets (liabilities), in thousands	Feb. 3, 2019			Jan. 28, 2018
Deferred rent	$	18,942		$	18,387
Merchandise inventories		18,703			23,314
Customer deposits		14,345			23,601
Stock-based compensation		14,281			9,024
Accrued liabilities		13,470			13,626
Compensation		11,251			14,127
State taxes		7,435			5,099
Executive deferred compensation		5,739			5,886
Federal and state net operating loss		4,223			6,026
Depreciation		(31,557	)		(17,361	)
Deferred lease incentives		(26,032	)		(24,854	)
Other		(4,797	)		(3,116	)
Valuation allowance		(3,542	)		(1,067	)
Prepaid catalog expenses		(936	)		(5,386	)
Total deferred income tax assets, net	$	41,525		$	67,306

As a result of the acquisition of Outward, Inc. (see Note O), we had net operating loss carry-forwards of $4,979,000 and $7,102,000 for U.S. federal and state, respectively, as of

February 3, 2019. A valuation allowance has been provided to the state net operating loss carry-forwards, as we don’t expect to fully utilize the losses in future years.

The following table summarizes the activity related to our gross unrecognized tax benefits:

In thousands	Fiscal 2018			Fiscal 2017			Fiscal 2016
Balance at beginning of year	$	18,051		$	25,864		$	13,290
Increases related to current year’s tax positions		4,694			3,345			11,772
Increases related to prior years’ tax positions		14,905			808			3,456
Decreases related to prior years’ tax positions		(1,279	)		(10,610	)		(818	)
Lapses in statute of limitations		(786	)		(1,356	)		(1,122	)
Settlements		(376	)		—			(714	)
Balance at end of year	$	35,209		$	18,051		$	25,864

As of February 3, 2019, we had $35,209,000 of gross unrecognized tax benefits of which $31,209,000 would, if recognized, affect the effective tax rate.

We accrue interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of February 3, 2019 and January 28, 2018, our accruals for the payment of interest and penalties totaled $5,437,000 and $3,719,000, respectively.

Due to the potential resolution of tax issues, it is reasonably possible that the balance of our gross unrecognized tax benefits could decrease within the next twelve months by a range of $0 to $10,800,000.

We file income tax returns in the U.S. and foreign jurisdictions. We are subject to examination by the tax authorities in these jurisdictions. Our U.S. federal taxable years for which the statute of limitations has not expired are fiscal years 2014 to 2017. Substantially all material states, local and foreign jurisdictions’ statutes of limitations are closed for taxable years prior to 2014.