Income Taxes

12 Months Ended

Aug. 28, 2011

Income Taxes

Income Taxes

Note 9—Income Taxes

Income before income taxes is comprised of the following:

	2011		2010		2009
Domestic (including Puerto Rico)	$	1,526	$	1,426	$	1,426
Foreign		857		628		301
Total	$	2,383	$	2,054	$	1,727

The provisions for income taxes for 2011, 2010, and 2009 are as follows:

	2011			2010		2009
Federal:
Current	$	409		$	445	$	396
Deferred		74			1		67
Total federal		483			446		463
State:
Current		78			79		66
Deferred		14			5		12
Total state		92			84		78
Foreign:
Current		270			200		94
Deferred		(4	)		1		(7	)
Total foreign		266			201		87
Total provision for income taxes	$	841		$	731	$	628

Tax benefits associated with the exercise of employee stock options and other employee stock programs were allocated directly to equity attributable to Costco in the amount of $59, $15, and $2, in 2011, 2010, and 2009, respectively.

The reconciliation between the statutory tax rate and the effective rate for 2011, 2010, and 2009 is as follows:

	2011					2010					2009
Federal taxes at statutory rate	$	834		35.0	%	$	718		35.0	%	$	604		35.0	%
State taxes, net		55		2.4			56		2.7			48		2.8
Foreign taxes, net		(66	)	(2.8	)		(38	)	(1.9	)		(24	)	(1.4	)
Other		18		0.7			(5	)	(0.2	)		0		0
Total	$	841		35.3	%	$	731		35.6	%	$	628		36.4	%

The components of the deferred tax assets and liabilities are as follows:

	2011		2010
Equity compensation	$	89	$	112
Deferred income/membership fees		134		118
Accrued liabilities and reserves		429		392
Other		32		35
Total deferred tax assets		684		657
Property and equipment		494		414
Merchandise inventories		164		170
Total deferred tax liabilities		658		584
Net deferred tax assets	$	26	$	73

The deferred tax accounts at the end of 2011 and 2010 include current deferred income tax assets of $360 and $307, respectively, included in deferred income taxes and other current assets; non-current deferred income tax assets of $53 and $10, respectively, included in other assets; and non-current deferred income tax liabilities of $387 and $244, respectively, included in deferred income taxes and other liabilities.

The Company has not provided for U.S. deferred taxes on cumulative undistributed earnings of certain non-U.S. consolidated subsidiaries, aggregating to $2,646 and $1,972 at the end of 2011 and 2010, respectively, as such earnings are deemed by the Company to be indefinitely reinvested. Because of the availability of U.S. foreign tax credits and complexity of the computation, it is not practicable to determine the U.S. federal income tax liability or benefit that would be associated with such earnings if such earnings were not deemed to be indefinitely reinvested.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2011 and 2010 is as follows:

	2011			2010
Gross unrecognized tax benefit at beginning of year	$	83		$	80
Gross increases—current year tax positions		21			29
Gross increases—tax positions in prior years		10			4
Gross decreases—tax positions in prior years		(6	)		(1	)
Settlements		(1	)		(27	)
Lapse of statute of limitations		(1	)		(2	)
Gross unrecognized tax benefit at end of year	$	106		$	83

Included in the balance at the end of 2011, are $64 of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods is $34 and $27 at the end of 2011 and 2010, respectively.

Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. The Company recognized $2 of expense and $7 of income related to interest and penalties in 2011 and 2010, respectively. Accrued interest and penalties are $12 and $9 at the end of 2011 and 2010, respectively.

The Company is currently under audit by several taxing jurisdictions in the United States and in several foreign countries. Some audits may conclude in the next 12 months and the unrecognized tax benefits we have recorded in relation to the audits may differ from actual settlement amounts. It is not possible to estimate the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next 12 months.

The Company files income tax returns in the United States, various state and local jurisdictions, in Canada and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local examination for years before fiscal 2007. The Company is currently subject to examination in Canada for fiscal years 2006 to present and in California for fiscal years 2004 to present. No other examinations are believed to be material.