Table of Contents 9. INCOME TAXES

We use the asset and liability method of accounting for income taxes. Using this method, deferred tax assets and liabilities are recorded based on differences between financial reporting and tax basis of assets and liabilities. The deferred tax assets and liabilities are calculated using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. We establish valuation allowances for tax benefits when we believe it is more likely than not that such assets will not be realized.

In accordance with FASB ASC 740: Accounting for Income Taxes ("FASB ASC 740"), we regularly evaluate the likelihood of recognizing the benefit for income tax positions we have taken in various federal and state filings by considering all relevant facts, circumstances, and information available. For those benefits that we believe it is more likely than not that the benefit will be sustained, we recognize the largest amount we believe is cumulatively greater

The provision for income taxes consists of the following:

2010 2009 2008 Current provision: Federal $2,121,604 $1,461,655 $766,333 State 286,171 197,828 202,600 2,407,775 1,659,483 968,933

Deferred provision (benefit): Federal (80,991) 37,632 428,660 State (9,529) 3,144 48,830 (90,520) 40,776 477,490

$2,317,255 $1,700,259 $1,446,423

Income before income taxes is earned in the following tax jurisdictions:

2010 2009 2008 United States $5,670,352 $4,437,072 $3,716,554 United Kingdom 319,290 324,924 (176,257) Canada 486,981 284,350 571,775 $6,476,623 $5,046,346 $4,112,072

The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows:

2010 2009 Deferred income tax assets: Allowance for doubtful accounts $55,414 $50,650 Capitalized inventory costs 154,712 131,447 Warrants and stock-based compensation 45,116 45,116 Accrued expenses, reserves, and other 97,383 89,384 Total deferred income tax assets 352,625 316,597

Deferred income tax liabilities: Property and equipment depreciation 534,639 604,287 Goodwill and other intangible assets amortization 139,020 123,193 Total deferred income tax liabilities 673,659 727,480

Net deferred tax asset (liability) $(321,034) $(410,883)

The net deferred tax liability is classified on the balance sheets as follows:

2010 2009 Current deferred tax assets $307,509 $271,481 Long-term deferred tax liabilities (628,543) (682,364) Net deferred tax asset (liability) $(321,034) $(410,883)

The effective tax rate differs from the statutory rate as follows:

2010 2009 2008 Statutory rate 34% 34% 34% State and local taxes 4% 4% 9% Domestic production activities deduction (1%) (2%) (2%) Other, net (1%) (2%) (4%) Effective rate 36% 34% 37%

We file a consolidated U.S. income tax return as well as state tax returns on a consolidated, combined or stand-alone basis, depending on the jurisdiction. We are no longer subject to U.S. federal income tax examinations by tax authorities for years prior to the tax year ended December 2008. Depending on the jurisdiction, we are no longer subject to state examinations by tax authorities for years prior to the December 2007 and December 2008 tax years.

10. COMMITMENTS AND CONTINGENCIES

Operating Leases

We lease our store locations under five-year lease agreements that expire on dates ranging from May 2011 to May 2016. Rent expense on all operating leases for the years ended December 31, 2010, 2009, and 2008, was $2,721,281, $2,513,297, and $2,575,642, respectively.

Future minimum lease payments under noncancelable operating leases at December 31, 2010 were as follows:

Year ending December 31: 2011 $2,498,662 2012 1,991,867 2013 1,261,561 2014 807,343 2015 399,534 2016 and thereafter 69,343 Total minimum lease payments $7,028,310

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