Chewy is subject to U.S. federal, state, and local corporate income taxes. The Company is included with PetSmart’s consolidated U.S. federal and state income tax returns. Income taxes as presented in the Company’s consolidated financial statements have been prepared on the separate return method as if the Company were a taxpayer separate from PetSmart.

The Company did not have a current or deferred provision for income taxes for any taxing jurisdiction during Fiscal Year 2019, Fiscal Year 2018, and Fiscal Year 2017.


	Fiscal Year
	2019		2018		2017
Federal statutory rate	21.0	%	21.0	%	33.9	%
State income taxes, net of federal tax benefit	4.4	%	1.5	%	1.1	%
Change in tax rate	0.6	%	—	%	(21.3)	%
Share-based compensation	4.0	%	—	%	7.4	%
Other	(2.1)	%	(1.1)	%	(1.3)	%
Change in valuation allowance	(27.9)	%	(21.4)	%	(19.8)	%
Effective rate	—	%	—	%	—	%


	As of
	February 2, 2020		February 3, 2019
Deferred tax assets:
Operating lease liabilities	$	53,578	$	—
Inventories	7,485		11,474
Deferred rent	—		7,415
Share-based compensation	29,639		—
Accrued expenses and reserves	10,814		10,271
Other	12,882		1,668
Net operating loss carryforwards	190,307		156,360
Total deferred tax assets	304,705		187,188
Less: valuation allowance	242,974		172,481
Deferred tax assets, net of valuation allowance	61,731		14,707
Deferred tax liabilities:
Operating lease right-of-use assets	44,428		—
Depreciation	15,681		14,707
Prepaids	1,622		—
Total deferred tax liabilities	61,731		14,707
Net deferred tax assets	$	—	$	—

As of February 2, 2020, the Company had federal and state net operating loss (“NOL”) carryforwards of $836.9 million and $281.6 million, respectively, of which $402.4 million expire beginning in 2030 and $716.1 million have no expiration but can only be used to offset 80% of the Company’s future taxable income. The state NOLs are presented as an apportioned amount. Although these carryforwards are available to offset future taxable income of the Company under the separate return method presented in these consolidated financial statements, they have already been used on federal consolidated income tax returns that the Company files with PetSmart.

As of February 2, 2020, the Company recorded a deferred tax asset of $190.3 million, before valuation allowance, with respect to NOL carryforwards. These deferred tax assets expire as follows (in thousands):

The Company participates in various federal credit programs which provide credits against current and future tax liabilities. Credits not used in the current year are carried forward to future years.


Year of Expiration	Research and Development		Work Opportunity		Hurricane Retention		Total
2036	$	227	$	—	$	—	$	227
2037	1,609		94		848		2,551
2038	1,622		761		—		2,383
2039	1,622		775		—		2,397
	$	5,080	$	1,630	$	848	$	7,558

The research and development credit is available to taxpayers that design, develop, or improve products, processes, techniques, formulas, or software. The work opportunity tax credit program is a federal government initiative designed to increase employment opportunities for people who typically experience certain barriers to employment. The hurricane retention credit is provided to certain employers to help them retain their employees during periods in which their place of business is inoperable due to the effects of hurricanes.

The realization of deferred tax assets is based on historical tax positions and estimates of future taxable income. We evaluate both the positive and negative evidence that we believe is relevant in assessing whether we will realize the deferred tax assets. A valuation allowance is recorded when it is more likely than not that some portion of the deferred tax assets will not be realized. To the extent that a valuation allowance has been established and it is subsequently determined that it is more likely than not that the deferred tax assets will be recovered, the valuation allowance will be released.

Our valuation allowance was $243.0 million as of February 2, 2020, which represents an increase of $70.5 million from February 3, 2019. The increase in the valuation allowance primarily relates to the following: (i) an increase of $74.3 million relating to current year activity, (ii) an increase of $1.5 million relating to changes to our state blended rate, and (iii) other changes totaling a decrease of $5.3 million for miscellaneous adjustments to our deferred tax assets and liabilities.

The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. We consider the scheduled reversal of deferred tax liabilities (including the effect of available carryback and carryforward periods), as well as projected pre-tax book income in making this assessment. To fully utilize the NOL and tax credits carryforwards we will need to generate sufficient future taxable income in each respective jurisdiction.


	Fiscal Year
	2019		2018		2017
Valuation allowance, as of beginning of period	$	172,481	$	115,143	$	43,015
Valuation allowances established	69,009		57,232		88,768
Changes to existing valuation allowances	1,484		106		(16,640)
Release of valuation allowances	—		—		—
Valuation allowance, as of end of period	$	242,974	$	172,481	$	115,143

The benefits of uncertain tax positions (“UTP”) are recorded in the Company’s consolidated financial statements only after establishing a more likely than not probability that the UTP will withstand challenge, if any, from tax authorities.

The Company’s federal income tax return for the period from March 17, 2016 through December 31, 2016, which represents the stub period after the Company’s conversion to a corporation, is currently being audited by the Internal Revenue Service (“IRS”). The Company is not currently subject to any other examinations. The Company may be subject to examination by the IRS and various states for the 2016 calendar year and thereafter.

Concurrent with the IPO, the Company and PetSmart entered into a tax sharing agreement which governs the respective rights, responsibilities, and obligations of the Company and PetSmart with respect to tax matters, including taxes attributable to PetSmart, entitlement to refunds, allocation of tax attributes, preparation of tax returns, certain tax elections, control of tax contests and other tax matters regarding U.S. federal, state, local, and foreign income taxes. During Fiscal Year 2019, the Company received $17.3 million from PetSmart in connection with the tax sharing agreement.