Overstock.com 2013 Annual Report Download - page 39

Table of Contents
application development stage of internal-use software and amortize these costs over the estimated useful life of two to three years. Costs incurred related to
design or maintenance of internal-use software are expensed as incurred.
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We are subject to taxation from federal, state and international jurisdictions. A significant amount of judgment is involved in preparing our provision
for income taxes and the calculation of resulting deferred tax assets and liabilities.
We account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”) which requires the asset and liability method of
accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary
differences between tax and financial reporting. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable
income in effect for the years in which those tax assets are expected to be realized or settled. We use the with-and-without approach, disregarding indirect tax
impacts, for determining the period in which tax benefits for excess share-based deductions are recognized. Net operating losses from prior years reduced
federal and state income tax obligations to the extent that we did not have significant income taxes payable at December 31, 2013 or 2012.
Since inception, we determined that a valuation allowance should be recorded against all of our net deferred tax assets. This quarterly assessment
required us to exercise significant judgment and make estimates about our ability to generate revenue, gross profit, operating income and taxable income in
future periods. Due to strong operating results in the last two years, including eight consecutive quarters of taxable income, and increased confidence that we
will continue to generate taxable income into the foreseeable future, our assessment regarding whether it is more likely than not that we will realize our deferred
tax assets has changed. The result was the full release of the $79.7 million valuation allowance on our deferred tax assets. In reaching this conclusion we
considered, among other things, our recent financial and operating results (three years of cumulative income, eight consecutive quarters of profitability and
strong revenue growth). We gave the most significant weight in our evaluation to the objective, direct positive evidence related to our recent strong financial
results, particularly our positive levels of pre-tax income. Historically, our pre-tax income and our taxable income have not varied by much other than one time
tax accounting method changes and the anomaly of the 2013 $6.8 million civil penalty assessed in a legal matter. Except as otherwise disclosed, there are no
known trends, events, transactions or other uncertainties that are expected to negatively impact the future levels of taxable income.
We performed multiple sensitivity analyses to address how potential changes in significant assumptions would impact our ability to generate the
minimum amount of taxable income required. We will continue to monitor the need for a valuation allowance against our federal and state deferred tax assets
quarterly, but at December 31, 2013 we believe it is more likely than not that these assets will be realized in future periods.
Accounting Standards Codification ("ASC") 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with GAAP. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. This statement also provides guidance on derecognition, classification, interest and
penalties, accounting in the interim periods and disclosure.
The calculation of our tax liabilities is subject to legal and factual interpretation, judgment, and uncertainty in a multitude of jurisdictions.
This includes addressing uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions in the U.S. and other
tax jurisdictions based on recognition and measurement criteria prescribed by ASC 740. The liabilities are periodically reviewed for their adequacy and
appropriateness. Changes to our assumptions could cause us to find a revision of estimates appropriate. Such a change in measurement would result in the
recognition of a tax benefit or an additional charge to the tax provision.
Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations,
and court rulings. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and
the extent to which, additional taxes and interest will be due. We record an amount as an estimate of probable additional income tax liability at the largest
amount that we determine is more likely than not, based upon the technical merits of the position, to be sustained upon audit by the relevant tax authority.
As of December 31, 2013, we were not under audit by any income tax authorities. Tax periods within the statutory period of limitations not
previously audited are potentially open for examination by the tax authorities. Potential liabilities associated with these years will be resolved when an event
occurs to warrant closure, primarily through the completion of audits by the tax jurisdictions and/or the expiration of the statutes of limitation. To the extent
audits or other events result in a
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