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Provision For Income Taxes
3 Months Ended
Oct. 31, 2011
Income Taxes [Abstract] 
Income Taxes
12. Provision for Income Taxes

The Company accounts for income taxes under the provisions of ASC 740, "Income Taxes". The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current period and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

It is the Company's policy to recognize interest and penalties accrued relative to unrecognized tax benefits in income tax expense. For the three month period ended October 31, 2011, no material changes occurred in the balance of unrecognized tax benefits. The Company accrued $370 in interest and penalties during the quarter ended October 31, 2011 related to the remaining uncertain tax benefits recorded at July 31, 2011.

The Company and its corporate subsidiaries file a consolidated U.S. federal income tax return, multiple U.S. state income tax returns and multiple Canadian income tax returns. The Company has been audited for U.S. federal purposes through fiscal 2007. Periodically, various state and local jurisdictions conduct audits and therefore a variety of other years are subject to state and local review. The Company is currently being audited by the State of California for the tax years ended July 31, 2007 and July 31, 2008. The Company has reserved for its exposure to additional payments for uncertain tax positions on its California income tax returns in its liability for unrecognized tax benefits. In addition, the Company is currently being audited by the State of Oregon for tax years ended July 31, 2006 through July 31, 2008 and has been notified by the State of Indiana that it will be audited for the tax years ended July 31, 2008, 2009 and 2010. No reserve has been established for possible payments or penalties in these states as the Company does not believe there are significant uncertain tax positions in its tax returns in Oregon and Indiana.

 

The overall effective income tax rate for the three months ended October 31, 2011 was 35.5% compared with 29.9% for the three months ended October 31, 2010. The primary reason for the increase in the overall effective income tax rate from October 31, 2010 to October 31, 2011 was the favorable settlement of certain state uncertain tax benefits that occurred for the three months ended October 31, 2010 as compared to the three months ended October 31, 2011, partially offset by a reduction to the state blended tax rate for the three months ended October 31, 2011 as compared to the three months ended October 31, 2010.

The Company anticipates a decrease of approximately $3,500 in unrecognized tax benefits, and $800 in accrued interest and penalties related to these unrecognized tax benefits, within the next 12 months from (1) expected settlements or payments of uncertain tax positions, and (2) lapses of the applicable statutes of limitations. Actual results may differ materially from this estimate.