NOTE 12—INCOME TAXES

The following is a summary of the income tax expense (benefit) (in thousands):

	Year Ended
	January 30,			January 31,			February 1,
	2016			2015			2014
Current
Federal	$	55,676		$	45,611		$	21,593
State		9,112			9,235			4,182
Foreign		227			(596	)		(454	)
Total current tax expense		65,015			54,250			25,321
Deferred
Federal		(5,691	)		3,895			6,215
State		(648	)		(973	)		(596	)
Foreign		105			1			(17	)
Total deferred tax expense (benefit)		(6,234	)		2,923			5,602
Total income tax expense	$	58,781		$	57,173		$	30,923

A reconciliation of the federal statutory tax rate to the Company’s effective tax rate is as follows:

	Year Ended
	January 30,			January 31,			February 1,
	2016			2015			2014
Provision at federal statutory tax rate		35.0	%		35.0	%		35.0	%
State income taxes—net of federal tax impact		3.7			4.0			5.8
Stock-based compensation		—			—			21.3
Valuation allowance		—			—			(0.1	)
Foreign income		(0.1	)		(0.3	)		(0.2	)
Net adjustments to tax accruals and other		0.6			(0.1	)		1.2
Effective tax rate		39.2	%		38.6	%		63.0	%

In November 2015, the FASB issued ASU 2015-17, which amends the current requirements for an entity to separate deferred income tax liabilities and assets into current and non-current amounts on the consolidated balance sheets. To simplify the presentation of deferred income taxes, the ASU requires that all deferred tax assets and liabilities be classified as non-current on the consolidated balance sheets. The Company has elected to early adopt the guidance on a retrospective basis effective with the consolidated balance sheet as of January 30, 2016. This is a change from the Company’s historical presentation whereby certain deferred tax assets and liabilities were classified as current and the remainder were classified as non-current. To conform to the current period presentation, the Company reclassified $27.9 million and $0.1 million which were previously included in current assets and current liabilities, respectively, as of January 31, 2015 to non-current assets and non-current liabilities, respectively, on the consolidated balance sheets.

Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

	January 30,			January 31,
	2016			2015
Non-current deferred tax assets (liabilities)
Stock-based compensation	$	32,248		$	29,894
Inventory		29,430			26,067
Deferred lease credits		20,074			14,963
Accrued expense		18,964			22,469
Deferred revenue		1,800			1,281
U.S. impact of Canadian transfer pricing		1,420			1,410
Net operating loss carryforwards		214			752
Property and equipment		(24,905	)		(17,113	)
Trademarks and domain names		(18,414	)		(18,271	)
Prepaid expense and other		(17,956	)		(22,182	)
Convertible senior notes		(4,719	)		1,035
State tax benefit		(3,052	)		(3,350	)
Construction allowance		—			(1,697	)
Other		1,793			1,378
Non-current deferred tax assets		36,897			36,636
Valuation allowance		(158	)		(176	)
Net non-current deferred tax assets		36,739			36,460

A reconciliation of the valuation allowance is as follows (in thousands):

	Year Ended
	January 30,			January 31,			February 1,
	2016			2015			2014
Balance at beginning of fiscal year	$	176		$	206		$	293
Net changes in deferred tax assets and liabilities		(18	)		(30	)		(87	)
Balance at end of fiscal year	$	158		$	176		$	206

The Company has recorded deferred tax assets and liabilities based upon estimates of their realizable value, such estimates are based upon likely future tax consequences. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, the Company records a valuation allowance.

As of January 30, 2016, the Company has retained a valuation allowance totaling $0.2 million against deferred tax assets for its Shanghai operations.

As of January 30, 2016, the Company had state net operating loss carryovers of $0.2 million. The state net operating loss carryovers will expire in 2019. Internal Revenue Code Section 382 and similar state rules place a limitation on the amount of taxable income which can be offset by net operating loss carryforwards after a change in ownership (generally greater than 50% change in ownership). The Company cannot give any assurances that it will not undergo an ownership change in the future resulting in further limitations on utilization of net operating losses.

A reconciliation of the exposures related to unrecognized tax benefits is as follows (in thousands):

	Year Ended
	January 30,			January 31,			February 1,
	2016			2015			2014
Balance at beginning of fiscal year	$	940		$	1,395		$	1,841
Gross decreases—prior period tax positions		(88	)		(122	)		(151	)
Gross increases—current period tax positions		69			—			—
Lapses in statute of limitations		—			(333	)		(295	)
Balance at end of fiscal year	$	921		$	940		$	1,395

As of both January 30, 2016 and January 31, 2015, $0.9 million of the exposures related to unrecognized tax benefits would affect the effective tax rate if realized and are included in other non-current obligations on the consolidated balance sheets. These amounts are primarily associated with foreign tax exposures that would, if realized, reduce the amount of net operating losses that would ultimately be utilized. As of January 30, 2016, the Company does not have any exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months.

The Company accounts for interest and penalties related to exposures as a component of income tax expense. The Company had interest accruals of $0.2 million associated with exposures as of both January 30, 2016, and January 31, 2015.

This Company is subject to tax in the United States, Canada, Shanghai and Hong Kong. The Company could be subject to United States federal and state tax examinations for years 2002 and forward by virtue of net operating loss carryforwards available from those years. There are two tax examination currently in progress in the United States. The Company may also be subject to audits in Canada for years 2008 and forward.