Income Taxes

U.S. Tax Reform, as enacted on December 22, 2017, made significant changes in the taxation of our domestic and foreign earnings. The change in the federal corporate tax rate also required revaluation of our deferred tax assets and liabilities to reflect the enacted rate at which we expect those differences to reverse. U.S. Tax Reform moves the U.S. to a territorial taxation system under which the earnings of foreign subsidiaries will generally not be subject to U.S. federal income tax upon distribution and imposed a one-time transition tax on the amount of previously untaxed earnings of those foreign subsidiaries measured as of November 2, 2017 or December 31, 2017, whichever resulted in the greater taxable amount. Additional changes included the increase in bonus depreciation available for certain assets acquired after September 27, 2017 and limitations on the deduction for certain expenses, including executive compensation and interest incurred in taxable years beginning on or after January 1, 2018. Other changes impacting foreign taxable income included, for years beginning after December 31, 2017, a tax on global intangible low-taxed income (“GILTI”), disallowance of deductions for certain payments (the base erosion anti-abuse tax, or “BEAT”) and new deductions enacted for certain foreign-derived intangible income (“FDII”).

The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided us with up to one year to complete accounting for the impacts of U.S. Tax Reform. In accordance with SAB 118, since our initial accounting for the U.S. Tax Reform impact was incomplete, we included a provisional income tax benefit of $11.5 million in our Fiscal 2017 consolidated statements of operations. The estimated provisional tax benefit primarily related to our deferred income tax assets and liabilities, including the impacts of the change in the federal corporate tax rate, deductions for executive compensation, our indefinite reinvestment assertion, the transition tax, GILTI, BEAT, and FDII. During Fiscal 2018 as we completed our calculation of the impact of U.S. Tax Reform, we did not recognize any material measurement period adjustments to the provisional amounts recognized in Fiscal 2017. The final impact of U.S. Tax Reform could change in the future if additional regulatory guidance is issued which clarifies or changes certain regulations as currently interpreted by us. In the Fourth Quarter of Fiscal 2018, we elected an accounting policy related to how we will account for GILTI and determined that we would recognize the impact of GILTI as a period cost.

The following table summarizes our distribution between domestic and foreign earnings (loss) before income taxes and the provision (benefit) for income taxes (in thousands):



	Fiscal 2018			Fiscal 2017		Fiscal 2016
Earnings from continuing operations before income taxes:
Domestic	$	85,050		$	78,707	$	84,843
Foreign	3,259			4,184		1,620
Earnings from continuing operations before income taxes	$	88,309		$	82,891	$	86,463

Income taxes:
Current:
Federal	$	12,543		$	11,710	$	19,704
State	4,474			3,775		4,475
Foreign	1,979			707		599
	18,996			16,192		24,778
Deferred—primarily Federal	3,141			1,690		8,108
Deferred—Foreign	(119		)	308		(922		)
Income taxes	$	22,018		$	18,190	$	31,964

Reconciliations of the United States federal statutory income tax rates and our effective tax rates are summarized as follows:



	Fiscal 2018		Fiscal 2017		Fiscal 2016
Statutory tax rate ⁽¹⁾	21.0	%	33.7	%	35.0	%
State income taxes—net of federal income tax benefit	4.6	%	3.6	%	3.8	%
Impact of foreign operations rate differential ⁽²⁾	0.7	%	(0.6	)%	(0.4	)%
Valuation allowance for foreign losses and other carry-forwards ⁽³⁾	(0.1	)%	1.1	%	(0.6	)%
U.S. Tax Reform impact of tax rate change on deferred tax amounts	—	%	(14.4	)%	—	%
Other, net	(1.3	)%	(1.5	)%	(0.8	)%
Effective tax rate for continuing operations	24.9	%	21.9	%	37.0	%
⁽¹⁾The statutory tax rate for Fiscal 2018 reflects the reduction of the federal corporate marginal tax rate to 21%, while Fiscal 2016 reflects the federal corporate marginal tax rate prior to U.S. Tax Reform of 35%. Fiscal 2017 is a blended rate that reflects the reduction of the federal corporate marginal tax rate effective January 1, 2018.
⁽²⁾Impact of foreign operations rate differential primarily reflects the rate differential between the United States and the respective foreign jurisdictions for any foreign income or losses, and the impact of any permanent differences.
⁽³⁾Valuation allowance for foreign losses and other carry-forwards primarily reflects the valuation allowance recorded due to our inability to recognize an income tax benefit related to certain operating loss carry-forwards and deferred tax assets during the period. The benefit in Fiscal 2018 and Fiscal 2016 was primarily due to the utilization of certain operating loss carryforward benefits against current year earnings and changes in our assessment of the likelihood of recognition of certain foreign operating loss carryforwards.

Deferred tax assets and liabilities included in our consolidated balance sheets are comprised of the following (in thousands):



	February 2, 2019			February 3, 2018
Deferred Tax Assets:
Inventories	$	13,210		$	12,207
Accrued compensation and benefits	8,096			7,660
Receivable allowances and reserves	890			1,630
Deferred rent and lease obligations	3,371			3,322
Operating loss and other carry-forwards	2,785			4,218
Other, net	4,122			3,739
Deferred tax assets	32,474			32,776
Deferred Tax Liabilities:
Depreciation and amortization	(11,917		)	(10,210		)
Acquired intangible assets	(32,913		)	(31,327		)
Deferred tax liabilities	(44,830		)	(41,537		)
Valuation allowance	(5,103		)	(5,624		)
Net deferred tax liability	$	(17,459	)	$	(14,385	)

As of February 2, 2019 and February 3, 2018 our operating loss and other carry-forwards primarily relate to our operations in Canada, Hong Kong and Japan, as well as certain states. The majority of these operating loss carry-forwards allow for carry-forward of at least 20 years and in some cases, indefinitely. The substantial majority of our valuation allowance of $5.1 million and $5.6 million as of February 2, 2019 and February 3, 2018, respectively, relates to the foreign and state operating loss carry-forwards and the deferred tax assets in those jurisdictions. The recent history of operating losses in certain jurisdictions is considered significant negative evidence against the future realizability of these tax benefits. The amount of the valuation allowance could change in the future if our operating results or estimates of future taxable operating results changes, particularly if, in future years, objective evidence in the form of cumulative losses is no longer present in the applicable jurisdictions. Alternatively, if we generate additional operating losses in future periods in certain jurisdictions, we may determine it is necessary to increase valuation allowances for certain deferred tax assets.

No deferred tax liabilities related to our original investments in our foreign subsidiaries and foreign earnings and profits ("E&P"), if any, were recorded in our consolidated balance sheet through Fiscal 2017, as substantially all our original investments and related earnings of our foreign subsidiaries have been considered reinvested outside of the United States. While U.S. Tax Reform made significant changes to how foreign earnings are taxed, we continue to assert that all of our investments in foreign subsidiaries and related earnings are permanently reinvested outside the United States. Therefore, we have not recorded any deferred tax liabilities related to investments and earnings in our consolidated balance sheets as of February 2, 2019. To the extent that foreign earnings were to be distributed, the foreign earnings should not be subject to federal tax under the new U.S. tax rules. While other taxes could be payable on such distributions, including state, foreign withholding or other taxes under foreign law, we believe that such tax expense would not be material.

Accounting for income taxes requires that we offset all deferred tax liabilities and assets within each tax jurisdiction and present them as a single amount in our consolidated balance sheets, with all net deferred tax assets or deferred tax liabilities by jurisdiction recognized as non-current deferred tax assets or deferred tax liabilities in our consolidated balance sheets. The amounts of deferred income taxes included in our consolidated balance sheets are as follows (in thousands):



	February 2, 2019			February 3, 2018
Assets:
Deferred tax assets	$	952		$	884
Liabilities:
Deferred tax liabilities	(18,411		)	(15,269		)
Net deferred tax liability	$	(17,459	)	$	(14,385	)