INCOME TAXES

12 Months Ended

Dec. 31, 2022

INCOME TAXES

INCOME TAXES

17.        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,
	2022		2021		2020
Domestic*	$	1,327,459	$	1,431,797	$	1,374,402
Foreign*		244,505		369,622		251,755
Income before provision for income taxes	$	1,571,964	$	1,801,419	$	1,626,157

*After intercompany royalties, management fees and interest charges from the Company’s domestic to foreign entities of $85.0 million, $61.1 million and $54.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Components of the provision for income taxes are as follows:

	Year Ended December 31,
	2022		2021		2020
Current:
Federal	$	247,482	$	273,115	$	259,073
State		47,255		44,990		43,704
Foreign		37,421		89,410		70,658
		332,158		407,515		373,435
Deferred:
Federal		19,111		14,750		11,401
State		258		4,689		4,709
Foreign		26,084		5,092		(167,595)
		45,453		24,531		(151,485)
Valuation allowance		2,729		(8,102)		(5,387)
	$	380,340	$	423,944	$	216,563

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,
	2022		2021		2020
U.S. Federal tax expense at statutory rates	$	330,113	$	378,298	$	341,493
State income taxes, net of federal tax benefit		35,848		38,894		37,478
Permanent differences		(5,450)		(4,168)		(1,064)
Stock based compensation		3,571		2,790		1,097
Intra-company transfer benefit		—		—		(165,075)
Other		1,371		(649)		(7,388)
Foreign rate differential		12,158		16,881		15,409
Valuation allowance		2,729		(8,102)		(5,387)
	$	380,340	$	423,944	$	216,563

Major components of the Company’s deferred tax assets (liabilities) at December 31, 2022 and 2021 are as follows:

	2022		2021
Deferred Tax Assets:
Reserve for sales returns	$	2,262	$	889
Reserve for inventory obsolescence		4,651		3,643
Reserve for marketing development fund		7,487		8,951
Capitalization of inventory costs		6,537		2,533
State franchise tax - current		2,339		2,493
Accrued compensation		10,499		2,854
Accrued other liabilities		1,820		4,634
Deferred revenue		63,196		68,557
Stock-based compensation		25,526		24,635
Foreign net operating loss carryforward		19,896		14,507
Prepaid supplies		7,901		6,317
Termination payments		52,466		58,042
Operating lease liabilities		5,739		4,711
Intangibles		33,603		72,666
Impairment-trademarks and others		2,567		2,047
Other deferred tax assets		33,209		33,013
Total gross deferred tax assets	$	279,698	$	310,492
Deferred Tax Liabilities:
Amortization of trademarks	$	(39,237)	$	(41,517)
State franchise tax - deferred		(5,503)		(5,505)
Operating lease ROU assets		(5,739)		(4,711)
Other deferred tax liabilities		(5)		(618)
Depreciation		(22,433)		(5,907)
Total gross deferred tax liabilities		(72,917)		(58,258)
Valuation Allowance		(29,742)		(27,013)
Net deferred tax assets	$	177,039	$	225,221

During the years ended December 31, 2022, 2021 and 2020, 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 increase the Company’s provision for income taxes by $2.7 million for the year ended December 31, 2022, decrease the Company’s provision for income taxes by $8.1 million for the year ended December 31, 2021 and decrease the Company’s provision for income taxes by $5.4 million for the year ended December 31, 2020. At December 31, 2022, the Company had net operating loss carryforwards of approximately $92.1 million. Of this amount, $78.8 million may be carried forward indefinitely. The remaining $13.3 million of net operating loss carryforwards will begin to expire in 2023.

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, 2022, 2021 and 2020:

	Gross Unrecognized Tax
	Benefits
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
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		(742)
Balance at December 31, 2021	$	—
Additions for tax positions related to the current year		—
Additions for tax positions related to the prior year		3,020
Decreases for tax positions related to prior years		—
Balance at December 31, 2022	$	3,020

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, 2022, 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 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 2019 through 2021 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 2018 through 2021 tax years.