Annual report pursuant to Section 13 and 15(d)

Income Taxes (Note)

v3.6.0.2
Income Taxes (Note)
 12 Months Ended
Dec. 31, 2016
Income Tax Expense (Benefit), Continuing Operations [Abstract]  
Income Taxes
INCOME TAXES
The components of the provision for income taxes are as follows (in thousands):

 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Current income tax (provision) benefit:
 
 
 
 
 
 
Federal
 
$
(51,616
)
 
$
(98,496
)
 
$
(96,269
)
State
 
(5,552
)
 
(11,829
)
 
(10,289
)
Current income tax (provision) benefit
 
(57,168
)
 
(110,325
)
 
(106,558
)
Deferred income tax benefit (provision):
 
 
 
 
 
 
Federal
 
(12,195
)
 
9,188

 
1,468

State
 
(1,657
)
 
1,522

 
547

Deferred income tax benefit (provision)
 
(13,852
)
 
10,710

 
2,015

Income tax (provision) benefit
 
$
(71,020
)
 
$
(99,615
)
 
$
(104,543
)


Current income taxes payable has been reduced by $3.8 million, $17.5 million, and $12.9 million for the years ended December 31, 2016, 2015 and 2014, respectively, for tax deductions attributable to stock-based compensation. The related income tax benefits of this stock-based compensation were recorded as amounts charged or credited to the income tax provision and additional paid-in capital.

The tax effects of cumulative temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2016 and 2015 are presented below (in thousands). The valuation allowance is related to items for which it is more likely than not that the tax benefit will not be realized.
 
 
December 31,
 
 
2016
 
2015
Deferred tax assets:
 
 
 
 
Provision for accrued expenses
 
$
31,659

 
$
38,472

Inventories
 
15,166

 
14,996

Stock-based compensation
 
15,667

 
14,132

Net operating losses
 
556

 
652

Other
 
3,556

 
4,160

Total deferred tax assets
 
66,604

 
72,412

Less valuation allowance
 
(533
)
 
(528
)
Net deferred tax assets
 
66,071

 
71,884

Deferred tax liabilities:
 
 
 
 
Intangible assets
 
(96,627
)
 
(91,051
)
Prepaid expenses
 
(10,682
)
 
(11,170
)
Property and equipment
 
(18,522
)
 
(14,161
)
Total deferred tax liabilities
 
(125,831
)
 
(116,382
)
Net deferred tax liability
 
$
(59,760
)
 
$
(44,498
)

At December 31, 2016, HSNi had $5.3 million of net operating loss carryforwards which begin expiring in 2017. HSNi had a valuation allowance of approximately $0.5 million as of December 31, 2016 and 2015. Valuation allowances are recorded for deferred tax assets related to separate state net operating losses.
A reconciliation of the income tax provision to the amounts computed by applying the statutory federal income tax rate to earnings before income taxes is shown as follows (in thousands):
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Income tax provision at the federal statutory rate of 35%
 
$
(66,405
)
 
$
(94,099
)
 
$
(97,135
)
State income taxes, net of effect of federal tax benefit
 
(4,686
)
 
(6,730
)
 
(6,306
)
Other, net
 
71

 
1,214

 
(1,102
)
Income tax provision
 
$
(71,020
)
 
$
(99,615
)
 
$
(104,543
)

 
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest, is as follows (in thousands):
 
 
2016
 
2015
 
2014
Balance at beginning of year
 
$
3,418

 
$
2,011

 
$
910

Additions based on tax positions related to the current year
 
648

 
630

 
525

Additions for tax positions of prior years
 
536

 
777

 
576

Reductions for tax positions of prior years
 
(34
)
 
—

 
—

Balance at end of year
 
$
4,568

 
$
3,418

 
$
2,011


As of December 31, 2016 and 2015, the unrecognized tax benefits, including interest, were $5.4 million and $4.1 million, respectively. At December 31, 2016 and 2015, there are approximately $4.6 million and $3.3 million of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate.
HSNi recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. There is no material interest on unrecognized tax benefits included in income tax expense for the years ended December 31, 2016, 2015 and 2014. At December 31, 2016 and 2015, HSNi has no material accrual for the payment of interest or penalties.
HSNi believes that it is reasonably possible that its unrecognized tax benefits could decrease by an immaterial amount within twelve months of the current reporting date due to settlement with the taxing authority.
HSNi is routinely under audit by federal, state, local and foreign tax authorities. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered sufficient to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between the reserves for tax contingencies and the amounts owed by HSNi are recorded in the period they become known.
The Internal Revenue Service ("IRS") has examined HSNi's consolidated federal income tax return for the year ended December 31, 2010 and performed a limited scope examination of HSNi's consolidated federal income tax return for the year ended December 31, 2011. No material adjustments resulted from these IRS examinations. New York State has completed it’s examination of income tax returns for the periods ended December 31, 2011 through December 31, 2013 without a material adjustment. The State of Florida has begun an income tax examination of HSNi’s tax returns for the years ended December 31, 2013 through December 31, 2015. HSNi does not anticipate any material adjustments to our tax liabilities resulting from this examination.
HSNi and several companies previously owned by IAC/InterActiveCorp, or IAC, were spun-off from IAC on August 20, 2008. In connection with the Spin-off, HSNi entered into a Tax Sharing Agreement with IAC. Pursuant to this agreement, each of the companies included in the Spin-off ("Spincos") was indemnified by IAC for additional tax liabilities related to consolidated or combined federal and state tax returns prepared and filed by IAC prior to the Spin-off. However, each Spinco agreed to, among other things, assume any additional tax liabilities related to their separately filed state income tax returns. All examinations have concluded or statutes of limitations have expired related to IAC's consolidated or combined federal and state tax returns for years including HSNi operations prior to the Spin-off.
The Tax Sharing Agreement also provides, among other things, that each Spinco indemnifies IAC and the other Spincos for any taxes resulting from the Spin-off of such Spinco (and any related interest, penalties, legal and professional fees, and all costs and damages associated with related shareholder litigation or controversies) to the extent such amounts result from any post Spin-off (i) act or failure to act by such Spinco described in the covenants in the Tax Sharing Agreement, (ii) acquisition of equity, securities, or assets of such Spinco or a member of its group, and (iii) breach by such Spinco or any member of its group of any representation or covenant contained in the separation documents or in the documents relating to the IRS private letter ruling and/or tax opinions. This indemnification remains effective until IAC's tax returns for the two year period after the Spin-off are no longer subject to examination.