Income Taxes

3 Months Ended

Mar. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company's effective income tax rate is based on estimated income for the year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable quarterly periods. Potential discrete adjustments include tax charges or benefits related to stock-based compensation, changes in tax legislation, settlements of tax audits or assessments, uncertain tax positions and acquisitions, among other items.

The Company is currently under audit in multiple jurisdictions and, in certain cases, is involved in litigation related to adverse audit determinations. In the second quarter of 2018, the Company filed an appeal with the Massachusetts Appellate Tax Board contesting the adverse audit findings related to certain tax benefits and exemptions and is awaiting a ruling following trial. The Company has determined that it is more-likely-than-not that it will prevail, and no reserve has been recorded related to these controversies. However, over the next 12 months, the Company’s current assumptions and positions could change based on audit determinations and other events impacting its analysis. Such events, if resolved unfavorably, could significantly impact the Company’s effective income tax rate and results of operations. The Company has estimated that an adverse ruling related to its Massachusetts controversy could ultimately result in a gross income tax charge of approximately $36.0 million, which may be partially offset by certain state tax credits of $26.0 million, which are not currently benefited as a result of the Company's valuation allowance assessment.

The Company’s effective income tax rate was 10.4% and 18.6% for the three months ended March 31, 2020 and 2019, respectively. The lower effective tax rate for the three months ended March 31, 2020, is primarily due to an increase in foreign income taxed at lower rates, an increase in the excess tax benefit related to stock-based compensation, a decrease in intercompany sales of intellectual property and a decrease in the valuation allowance recorded against deferred tax assets related to state tax credits. These amounts were partially offset by a decrease in the benefit of U.S. federal, state and foreign research and development credits.

For the three months ended March 31, 2020, the effective income tax rate was lower than the federal statutory tax rate due to foreign income taxed at lower rates, the excess tax benefit related to stock-based compensation and the benefit of U.S. federal, state and foreign research and development credits. These amounts were partially offset by the valuation allowance recorded against deferred tax assets related to state tax credits, non-deductible stock-based compensation and state taxes.

For the three months ended March 31, 2019, the effective income tax rate was lower than the federal statutory tax rate due to foreign income taxed at lower rates, the excess tax benefit related to stock-based compensation and the benefit of U.S. federal, state and foreign research and development credits. These amounts were partially offset by the valuation allowance recorded against deferred tax assets related to state tax credits, non-deductible executive compensation, state taxes and an intercompany sale of intellectual property.

In response to the novel coronavirus, or COVID-19, pandemic, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted on March 27, 2020. The CARES Act did not have a material impact on the effective tax rate for the period ending March 31, 2020. The Company will continue to monitor further changes to the global legislative and regulatory developments enacted as a result of COVID-19.