INCOME TAXES

Income tax expense consists of the following:



Fiscal year	2012		2011			2010
Current income taxes:
Federal		$362		$359			$324
State and local	66		63			52
Total current income tax expense	428		422			376
Deferred income taxes:
Federal	21		20			4
State and local	1		(6		)	(2		)
Total deferred income tax expense	22		14			2
Total income tax expense		$450		$436			$378

A reconciliation of the statutory federal income tax rate to the effective tax rate on earnings before income taxes is as follows:



Fiscal year	2012		2011		2010
Statutory rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal income taxes	3.6		3.6		3.4
Non-taxable acquisition-related items	—		0.6		—
Other, net	(0.6	)	(0.2	)	(0.2	)
Effective tax rate	38.0	%	39.0	%	38.2	%

In 2011, we acquired HauteLook in a tax-free merger transaction. The non-taxability of certain acquisition-related items, including goodwill impairment, resulted in an increase in our effective tax rate in 2011.

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



	February 2, 2013			January 28, 2012
Compensation and benefits accruals		$177			$167
Allowance for sales returns	51			45
Accrued expenses	43			41
Merchandise inventories	24			22
Gift cards and gift certificates	18			17
Loyalty reward certificates	22			17
Allowance for credit losses	33			45
Federal benefit of state taxes	7			6
Gain on sale of interest rate swap	24			29
Other	13			17
Total deferred tax assets	412			406
Land, buildings and equipment basis and depreciation differences	(90		)	(63		)
Total deferred tax liabilities	(90		)	(63		)
Net deferred tax assets		$322			$343

A reconciliation of the beginning and ending amount of unrecognized tax benefits for 2012, 2011 and 2010 is as follows:



Fiscal year	2012			2011			2010
Unrecognized tax benefit at beginning of year		$21			$43			$43
Gross increase to tax positions in prior periods	1			14			3
Gross decrease to tax positions in prior periods	(7		)	(14		)	(3		)
Gross increase to tax positions in current period	1			2			3
Settlements	(1		)	(24		)	(3		)
Unrecognized tax benefit at end of year		$15			$21			$43

Settlement activity in 2011 includes amounts paid for a state tax matter and to close our 2008 IRS audit.

At the end of 2012, 2011 and 2010, $7, $11 and $21 of the ending gross unrecognized tax benefit related to items which, if recognized, would affect the effective tax rate.

Our income tax expense included a decrease to expense of $1 in 2012 and $4 in 2011 and an increase to expense of $5 in 2010 for tax-related interest and penalties. At the end of 2012, 2011 and 2010, our liability for interest and penalties was $7, $5 and $11.

We file income tax returns in the U.S. and a limited number of foreign jurisdictions. With few exceptions, we are no longer subject to federal, state and local, or non-U.S. income tax examinations for years before 2008. Unrecognized tax benefits related to federal, state and local tax positions may decrease by $2 by February 1, 2014, due to the completion of examinations and the expiration of various statutes of limitations.