226  Reorganizing the Financial Statements 
percent. This value includes both federal taxes (21.0 percent) and state taxes 
(3.6 percent). To determine statutory taxes on EBITA, multiply the statutory 
tax rate (24.6 percent) by EBITA ($4,828 million), which was estimated in Ex-
hibit 11.9. In 2019, statutory taxes on EBITA were $1,187 million.
Next, search the tax reconciliation table for other operating taxes. We clas-
sify foreign income taxed at rates different from the U.S. statutory rate ($1 mil-
lion) and tax savings from the employee stock ownership plan ($18 million) as 
operating. In contrast, taxes related to the substantial change in U.S. corporate 
tax rates brought about by the 2017 Tax Cuts and Jobs Act are a one-time event. 
Therefore, treat them as nonoperating. To determine other operating taxes, sum 
across operating-related tax adjustments. In 2019, other operating taxes de-
creased Costco’s taxes on EBITA by $19 million. Summing statutory taxes on 
EBITA ($1,187 million) and other operating taxes (–$19 million) leads to $1,168 
million in operating taxes.
To convert operating taxes into operating cash taxes, add (subtract) the 
increase in operating deferred-tax assets (liabilities). As discussed in the section 
on invested capital, do not incorporate the change in nonoperating deferred 
taxes into cash taxes. Instead, value nonoperating deferred taxes as part of 
your valuation of the corresponding nonoperating account. For instance, fu-
ture taxes on pension shortfalls should be computed using projected contribu-
tions, not on the historical deferred-tax account.
Exhibit 11.7 separates Costco’s operating and nonoperating deferred taxes. 
Since operating deferred-tax assets net of liabilities decreased in 2019, Costco 
is paying less in cash taxes than reported using accrual accounting. In 2019, 
operating deferred-tax assets net of liabilities fell by $159 million. Therefore, 
operating taxes of $1,168 million is reduced by $159 million to estimate operat-
ing cash taxes at $1,009 million.9
Like other balance sheet accounts, operating deferred-tax accounts rise 
and fall for reasons other than deferrals, such as acquisitions, divestitures, 
and revaluations. However, only organic changes in deferred taxes should be 
included in operating cash taxes, not one-time changes resulting from revalu-
ation or consolidation. For instance, most American companies revalued their 
2018 deferred-tax accounts to reflect the 2017 Tax Cuts and Jobs Act. To esti-
mate the organic change in deferred-tax assets and liabilities, estimate what 
the change would have been if tax rates had remained unchanged. In the case 
of Costco, the effect was immaterial.
For many companies, a clean measure of operating cash taxes may be im-
possible to calculate. When this is the case, use operating taxes without con-
verting to cash.
9 In Appendix H, we forecast the operating cash tax rate as part of our valuation of Costco. Since the 
percentage of Costco’s taxes that are deferred is volatile, we use a five-year average to estimate the 
percentage of operating taxes that are likely to be deferred.