Note 7— Taxes

The interim financial statement provision for income taxes is different from the amounts computed by applying the United States federal statutory income tax rate of 34%. In summary, the reasons for these differences are as follows:

	Nine Months ended September 30
	2013		2012

Income taxes at U.S. statutory rate	$	206,000	$	504,000
State income taxes, net of federal benefit		60,000		81,000
Higher/(lower) effective taxes on earnings in foreign countries		77,000		(20,000)
Foreign corporate income taxes		30,000		35,000
Other, net		(40,000)		(41,000)

	$	333,000	$	559,000

One of the Company's foreign subsidiaries is presently under local country audit for alleged deficiencies (totaling approximately $800,000 plus interest at 20% per annum) in value-added tax (VAT) and withholding tax for the years 2004 through 2006. The Company, in consultation with its legal counsel, believes that there are strong legal grounds that it is not liable to pay the majority of the alleged tax deficiencies. As of December 31, 2010, management estimated and reserved approximately $185,000 in taxes and interest for resolution of this matter and recorded this amount within Selling, General, and Administrative expense in the 2010 Consolidated Statement of Income. In 2011, the Company made good faith deposits to the local tax authority under the tax agency's administrative judicial resolution process. As of September 30, 2013 and December 31, 2012, management's estimated reserve (net of deposits) for this matter is approximately $70,000. There has been no change in this matter during the first nine months of 2013.