Your California Climate Disclosure Journey: "Doing Business in California": What it Means for Climate Disclosure

California has long been a trailblazer in climate policy, and with the recent enactment of Senate Bill (SB) 253 and SB 261, the state is once again leading the charge in corporate climate transparency. These landmark laws require thousands of companies "doing business in California" to publicly disclose their greenhouse gas (GHG) emissions and climate-related financial risks. But for many businesses, a critical question immediately arises: How exactly does the California Air Resources Board (CARB) define "doing business in California" for the purpose of these new regulations?

It's a question at the heart of CARB's implementation efforts, as accurately defining this term, along with "revenue" and corporate relationships (like parent-subsidiary structures), is essential for determining who is covered by these new reporting mandates.

CARB's Initial Approach: Leaning on Existing Tax Code

CARB's initial staff concept for defining "doing business in California" favors utilizing existing California Revenue and Tax Code definitions, specifically Section 23101, subsections A and B. The idea is to foster consistency across various California regulatory frameworks.

Generally, this tax code defines "doing business" as "actively engaging in any transaction for the purpose of financial or pecuniary gain or profit". It further refines this by including specific economic thresholds, helping to determine if a business has a substantial connection to the state. CARB is also considering incorporating Section 23101.5, which helps distinguish companies with meaningful economic activity from those with only minor or exempt activities.

However, CARB acknowledges that while this tax code provides a valuable starting point, it may need modifications to fully align with the objectives of the climate disclosure laws. The goal is to harmonize with existing definitions while ensuring the final regulation isn't "overly broad".

The Broader Picture: Revenue and Corporate Relationships

Beyond "doing business," two other definitional aspects are critical for determining applicability:

• Revenue: The laws apply to companies based on annual revenue thresholds ($1 billion for SB 253 and $500 million for SB 261). CARB's initial concept for "total annual revenues" refers to gross receipts as defined in California Revenue and Taxation Code Section 25120. Stakeholders have raised important questions about how revenue should be determined, particularly concerning parent and subsidiary relationships, and how certain income sources (like interest or investment income in the financial sector) should be treated
• Parent and Subsidiary Relationships: This is another complex area. If a subsidiary company is "doing business in California," do the reporting requirements extend to its parent company located outside of California? CARB is considering precedents from California's Cap and Trade program, which defines a corporate association based on ownership or control (generally 50% or greater). However, this approach has historically presented documentation challenges for some participants. The key concern is whether consolidated parent-level reporting, which is allowable under SB 219, will be required when a subsidiary is in scope, especially for foreign parents with U.S.-based subsidiaries.

Stakeholder Concerns and CARB's Collaborative Path

During recent public workshops, numerous stakeholders voiced concerns about the proposed definitions. Many found the tax code's "doing business in California" definition potentially too broad, arguing it could encompass companies with very minimal presence or greenhouse gas emissions within the state, or even those whose only connection is through remote California employees. A significant concern raised by employees and companies alike is the potential for a low threshold to lead to layoffs of California-based remote workers, as businesses might opt to avoid the compliance costs associated with reporting for their entire global operations.

CARB fully understands these complexities. As a state agency, it must adhere to California's Administrative Procedure Act (APA), which demands a high standard for clarity and specificity in regulations. This means that while existing voluntary protocols are a valuable foundation, CARB's final regulatory language must use definitive terms like "require" rather than suggestive language like "should" or "could consider".

To navigate this intricate landscape, CARB is committed to an iterative and collaborative public process. They are actively soliciting feedback on their initial staff concepts for "doing business in California," "revenue," and corporate relationships. The board explicitly asks stakeholders to provide detailed input on whether the proposed definitions cast "too large a net" and if additional modifications are needed to provide regulatory clarity. The aim is to understand what works, what's missing, and how the regulations can be improved to be "streamlined, sound, and clear".

Our Role in Shaping the Future

For companies, understanding these definitions is not just a regulatory hurdle; it's a foundational step in preparing for compliance. CARB's proactive engagement means there's a vital opportunity for businesses and stakeholders to shape these critical definitions. Your specific ideas on how to refine the "doing business in California" definition, clarify revenue calculations, and manage parent-subsidiary reporting are essential for ensuring the final regulations are effective, practical, and fair.

As a California based climate company and an expert in emissions calculations, ESG reporting and mitigation recommendations, SINAI understands these regulations. CARB is listening and by actively participating in their public process and providing detailed feedback, we can help ensure that California's ambitious climate disclosure programs meet their goals while minimizing unintended burdens for our customers as well as the rest of the industry. In the  meantime, SINAI’s offering is built to be customized and can flex to meet these changing regulatory needs so customers are never left in audit jeopardy based on ever changing regulations. Most experts agree - these regulations will not stop at reporting, the next step will be reduction. We need to be ready!

‍