13. INCOME TAXES

Components of the provision for income taxes are as follows:

	Year Ended December 31,
	2012		2011		2010
Current:
Federal	$	177,372	$	146,385	$	111,217
State	30,268		22,526		27,139
Foreign	3,951		2,827		279
	211,591		171,738		138,635

Deferred:
Federal	(743)		634		(3,913)
State	(483)		465		747
Foreign	(7,373)		(3,583)		(1,573)
	(8,599)		(2,484)		(4,739)

Valuation allowance	6,142		1,797		3,377
	$	209,134	$	171,051	$	137,273

The differences in the total provision for income taxes that would result from applying the 35% federal statutory rate to income before provision for income taxes and the reported provision for income taxes are as follows:

	Year Ended December 31,
	2012		2011		2010
U.S. Federal tax expense at statutory rates	$	192,204	$	160,045	$	122,256
State income taxes, net of federal tax benefit	20,252		14,917		18,126
Permanent differences	5,968		1,176		1,634
Domestic production deduction	(15,469)		(11,551)		(9,450)
Other	37		4,667		1,330
Valuation allowance	6,142		1,797		3,377
	$	209,134	$	171,051	$	137,273

Major components of the Company’s deferred tax assets (liabilities) at December 31 are as follows:

	2012		2011
Deferred Tax Assets:
Reserve for sales returns	$	145	$	186
Reserve for doubtful accounts	28		42
Reserve for inventory obsolescence	2,753		3,082
Reserve for marketing development fund	4,595		4,485
Capitalization of inventory costs	1,524		972
State franchise tax	5,268		4,817
Accrued compensation	49		256
Accrued other liabilities	1,825		487
Deferred revenue	49,597		51,477
Stock-based compensation	19,965		16,605
Securities impairment	2,104		2,402
Foreign net operating loss carryforward	13,529		7,511
Prepaid supplies	2,008		3,159
Total gross deferred tax assets	$	103,390	$	95,481

Deferred Tax Liabilities:
Amortization of trademarks	$	(9,179)	$	(7,911)
Unrealized gain on available-for-sale investments	(1,006)		-
Amortization of graphic design	(81)		(52)
Depreciation	(5,304)		(7,340)
Total gross deferred tax liabilities	(15,570)		(15,303)

Valuation Allowance	(11,316)		(5,174)

Net deferred tax assets	$	76,504	$	75,004

During the second fiscal quarter of 2010 and the first and fourth quarters of 2012, the Company established a full valuation allowance against deferred tax assets, resulting from cumulative net operating losses incurred by certain foreign subsidiaries of the Company. The effect of the valuation allowance and its related impact on the Company’s overall tax rate was to increase the Company’s provision for income taxes by $6.1 million, $1.8 million and $3.4 million for the years ended December 31, 2012, 2011 and 2010, respectively. At December 31, 2012, the Company had net operating loss carryforwards of approximately $74.5 million. Of this amount, $67.2 million may be carried forward indefinitely. The remaining $7.3 million will begin to expire in 2017.

The following is a rollforward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the years ended December 31, 2012, 2011 and 2010:

	Gross Unrealized Tax Benefits
Balance at January 1, 2010	$	397
Additions for tax positions related to the current year	-
Additions for tax positions related to the prior year	68
Decreases for tax positions related to prior years	-
Balance at December 31, 2010	$	465
Additions for tax positions related to the current year	-
Additions for tax positions related to the prior year	1,445
Decreases for tax positions related to prior years	-
Balance at December 31, 2011	$	1,910
Additions for tax positions related to the current year	-
Additions for tax positions related to the prior year	520
Decreases for tax positions related to prior years	(1,504)
Balance at December 31, 2012	$	926

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of December 31, 2012, the Company had accrued approximately $0.3 million in interest and penalties related to unrecognized tax benefits. If the Company were to prevail on all uncertain tax positions it would not have a significant impact on the Company’s effective tax rate.

It is expected that the amount of unrecognized tax benefits will not significantly change within the next 12 months.

On February 10, 2011, the Internal Revenue Service (“IRS”) began its examination of the Company’s U.S. federal income tax returns for the years ended December 31, 2008 and 2009. The examination was completed in April 2012 with no material adjustments. The Company is also currently under examination by certain state jurisdictions.

The Company is subject to U.S. federal income tax as well as to income tax in multiple state and foreign jurisdictions. Federal income tax returns are subject to IRS examination for the 2010 and 2011 tax years. State income tax returns are subject to examination for the 2008 through 2011 tax years.