TAXES BASED ON INCOME

12 Months Ended

Feb. 03, 2024

TAXES BASED ON INCOME

TAXES BASED ON INCOME

4. TAXES BASED ON INCOME

The provision for taxes based on income consists of:

	2023		2022		2021
Federal
Current	$	707	$	401	$	349
Deferred		(130)		162		(46)
Subtotal federal		577		563		303
State and local
Current		114		91		67
Deferred		(24)		(1)		15
Subtotal state and local		90		90		82
Total	$	667	$	653	$	385

A reconciliation of the statutory federal rate and the effective rate follows:

	2023		2022		2021
Statutory rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal tax benefit	2.5		2.5		3.2
Credits	(1.1)		(0.8)		(1.3)
Resolution of tax audit examinations	—		(0.2)		(3.1)
Excess tax benefits from share-based payments	(0.7)		(1.9)		(1.3)
Impairment of goodwill related to Vitacost.com	—		1.2		—
Non-deductible legal settlements	1.4		—		—
Non-deductible executive compensation	0.3		0.5		0.6
Other changes, net	0.1		0.2		(0.3)
Effective income tax rate	23.5	%	22.5	%	18.8	%

The 2023 tax rate differed from the federal statutory rate due to the effect of state income taxes and the nondeductible portion of opioid settlement charges, partially offset by the benefit from share-based payments and the utilization of tax credits.

The 2022 tax rate differed from the federal statutory rate due to the effect of state income taxes and non-deductible goodwill impairment charges related to Vitacost.com, partially offset by the benefits from share-based payments and the utilization of tax credits.

The 2021 tax rate differed from the federal statutory rate primarily due to a discrete benefit of $47 which was primarily from the favorable outcome of income tax audit examinations covering multiple years, the benefit from share-based payments and the utilization of tax credits, partially offset by the effect of state income taxes.

The tax effects of significant temporary differences that comprise tax balances were as follows:

	2023		2022
Deferred tax assets:
Compensation related costs	$	361	$	409
Lease liabilities		2,100		1,892
Closed store reserves		51		51
Unrealized losses on hedging instruments		—		74
Net operating loss and credit carryforwards		76		101
Deferred income		102		104
Legal settlements		313		—
Allowance for uncollectible receivables		30		26
Other		—		13
Subtotal		3,033		2,670
Valuation allowance		(55)		(83)
Total deferred tax assets		2,978		2,587
Deferred tax liabilities:
Depreciation and amortization		(2,038)		(1,954)
Operating lease assets		(1,985)		(1,759)
Insurance related costs		(241)		(257)
Inventory related costs		(259)		(281)
Equity investments in excess of tax basis		—		(8)
Other		(16)		—
Total deferred tax liabilities		(4,539)		(4,259)
Deferred income taxes	$	(1,561)	$	(1,672)

As of February 3, 2024, deferred tax assets of $18 are included in “Other assets” in the Company’s Consolidated Balance Sheets. At February 3, 2024, the Company had net operating loss carryforwards for state income tax purposes of $1,499. These net operating loss carryforwards expire from 2024 through 2043.  The utilization of certain of the Company’s state net operating loss carryforwards may be limited in a given year. Further, based on the analysis described below, the Company has recorded a valuation allowance against some of the deferred tax assets resulting from its state net operating losses.

At February 3, 2024, the Company had state credit carryforwards of $7 which expire from 2024 through 2037.  The utilization of certain of the Company’s credits may be limited in a given year. Further, based on the analysis described below, the Company has recorded a valuation allowance against some of the deferred tax assets resulting from its state credits.

The Company regularly reviews all deferred tax assets on a tax filer and jurisdictional basis to estimate whether these assets are more likely than not to be realized based on all available evidence. This evidence includes historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies. Projected future taxable income is based on expected results and assumptions as to the jurisdiction in which the income will be earned. The expected timing of the reversals of existing temporary differences is based on current tax law and the Company’s tax methods of accounting. Unless deferred tax assets are more likely than not to be realized, a valuation allowance is established to reduce the carrying value of the deferred tax asset until such time that realization becomes more likely than not. Increases and decreases in these valuation allowances are included in "Income tax expense" in the Consolidated Statements of Operations. As of February 3, 2024, January 28, 2023, and January 29, 2022, the total valuation allowance was $55, $83, and $72, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, including positions effecting only the timing of tax benefits, is as follows:

	2023		2022		2021
Beginning balance	$	93	$	100	$	193
Additions based on tax positions related to the current year		10		8		10
Additions for tax positions of prior years		3		6		9
Reductions for tax positions of prior years		(9)		(4)		(108)
Settlements		(1)		(9)		—
Lapse of statute		(6)		(8)		(4)
Ending balance	$	90	$	93	$	100

As of February 3, 2024, January 28, 2023, and January 29, 2022 the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $62, $66, and $73 respectively.

To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense. During the years ended February 3, 2024, January 28, 2023, and January 29, 2022, the Company recognized approximately $1, $(6), and $(15), respectively, in interest and penalties (recoveries). The Company had accrued approximately $15, $14, and $22 for the payment of interest and penalties as of February 3, 2024, January 28, 2023, and January 29, 2022, respectively.

As of February 3, 2024, the years ended February 1, 2020 and forward remain open for review for federal income tax purposes.