13. INCOME TAXES

Components of the provision for income taxes are as follows:

	Year Ended December 31,
	2013		2012		2011
Current:
Federal	$	191,596	$	177,372	$	146,385
State	36,662		30,268		22,526
Foreign	4,052		3,951		2,827
	232,310		211,591		171,738

Deferred:
Federal	(7,441)		(743)		634
State	(1,443)		(483)		465
Foreign	(9,694)		(7,373)		(3,583)
	(18,578)		(8,599)		(2,484)

Valuation allowance	11,501		6,142		1,797
	$	225,233	$	209,134	$	171,051

The differences in the total provision for income taxes that would result from applying the 35% federal statutory rate to income before provision for income taxes and the reported provision for income taxes are as follows:

	Year Ended December 31,
	2013		2012		2011
U.S. Federal tax expense at statutory rates	$	197,363	$	192,204	$	160,045
State income taxes, net of federal tax benefit	22,640		20,252		14,917
Permanent differences	936		5,968		1,176
Domestic production deduction	(16,039)		(15,469)		(11,551)
Other	266		(388)		1,538
Foreign rate differential	8,566		425		3,129
Valuation allowance	11,501		6,142		1,797
	$	225,233	$	209,134	$	171,051

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

	2013		2012
Deferred Tax Assets:
Reserve for sales returns	$	583	$	145
Reserve for doubtful accounts	62		28
Reserve for inventory obsolescence	2,060		2,753
Reserve for marketing development fund	9,470		4,595
Capitalization of inventory costs	1,949		1,524
State franchise tax	6,043		5,268
Accrued compensation	867		49
Accrued other liabilities	4,871		1,825
Deferred revenue	50,813		49,597
Stock-based compensation	21,963		19,965
Securities impairment	273		2,104
Foreign net operating loss carryforward	19,346		13,529
Prepaid supplies	4,639		2,008
Total gross deferred tax assets	$	122,939	$	103,390

Deferred Tax Liabilities:
Amortization of trademarks	$	(10,393)	$	(9,179)
Unrealized gain on available-for-sale investments	-		(1,006)
Amortization of graphic design	(94)		(81)
Depreciation	(5,828)		(5,304)
Total gross deferred tax liabilities	(16,315)		(15,570)

Valuation Allowance	(22,089)		(11,316)

Net deferred tax assets	$	84,535	$	76,504

During the years ended December 31, 2013, 2012 and 2011, the Company established full valuation allowances against deferred tax assets, resulting from cumulative net operating losses incurred by certain foreign subsidiaries of the Company. The effect of the valuation allowances and their related impact on the Company’s overall tax rate was to increase the Company’s provision for income taxes by $10.8 million, $6.1 million, and $1.8 million for the years ended December 31, 2013, 2012 and 2011, respectively. At December 31, 2013, the Company had net operating loss carryforwards of approximately $95.1 million. Of this amount, $73.9 million may be carried forward indefinitely. The remaining $21.2 million will begin to expire in 2017.

The following is a rollforward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the years ended December 31, 2013, 2012 and 2011:

	Gross Unrealized Tax Benefits
Balance at January 1, 2011	$	465
Additions for tax positions related to the current year	-
Additions for tax positions related to the prior year	1,445
Decreases for tax positions related to prior years	-
Balance at December 31, 2011	$	1,910
Additions for tax positions related to the current year	-
Additions for tax positions related to the prior year	520
Decreases for tax positions related to prior years	(1,504)
Balance at December 31, 2012	$	926
Additions for tax positions related to the current year	-
Additions for tax positions related to the prior year	9
Decreases for tax positions related to prior years	-
Balance at December 31, 2013	$	935

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of December 31, 2013, 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 benefits will not significantly change within the next 12 months.

On March 8, 2013, the Internal Revenue Service (“IRS”) began its examination of the Company’s U.S. federal income tax returns for the years ended December 31, 2010 and 2011. The Company is also in various stages of examination with certain states.

The Company is subject to U.S. federal income tax as well as to income tax in multiple state and foreign jurisdictions. Federal income tax returns are subject to IRS examination for the 2010, 2011 and 2012 tax years. State income tax returns are subject to examination for the 2009 through 2012 tax years.