Compliance considerations
Revenue thresholds
CARB defines “revenue” based on the “gross receipts” concept outlined in California Revenue and Taxation Code Section 25120(f)(2). This includes the total amount realized from sales, exchanges of property, provision of services or use of property or capital—such as rents, royalties, interest and dividends—in transactions that generate business income. Importantly, these amounts are not reduced by the cost of goods sold or the basis of the property sold. The income, gain or loss is recognized (or would be recognized) under the Internal Revenue Code as applicable.
To address fluctuations in revenue that may affect reporting obligations, CARB determines applicability by looking at the lesser revenue figure from the entity’s two most recent fiscal years. If revenue falls below the SB 253 or SB 261 threshold in either year, the entity is not required to report for that cycle.
According to CARB’s FAQs (FAQ 8), revenue calculations consider total gross receipts regardless of whether the income was generated within California. Additionally, the revenue threshold is assessed at the individual company level. However, if a parent company and its subsidiaries file taxes as a unitary business in California, the subsidiaries’ revenues are aggregated with the parent’s gross receipts to determine applicability. Entities should refer to their corporate tax filings to verify gross receipts (FAQ 15).
Doing business in California:
CARB staff proposes to define “doing business in California” in accordance with Revenue and Taxation Code Section 23101, with certain exceptions.
At its core, Section 23101(a) defines “doing business” as actively engaging in any transaction for financial or pecuniary gain or profit.
Under Section 23101(b), an entity is considered to be doing business in California during any part of a reporting year if it meets either of the following criteria:
- The entity is organized or commercially domiciled in California.
- The entity’s sales in California exceed the inflation-adjusted threshold of $735,019 for 2024, as defined in Revenue and Taxation Code Section 25120(e) or (f). This includes sales made by agents or independent contractors and accounts for the pro rata or distributive share of pass-through entities. Sales are determined based on specific assignment rules outlined in the Revenue and Taxation Code.
Notably, CARB staff proposes to exclude the criteria related to property holdings and payroll, found in Sections 23101(b)(3) and (4), from this definition.
Parent and subsidiaries
Both SB 253 and SB 261 permit parent companies to submit consolidated reports on behalf of their in-scope subsidiaries.
According to CARB’s proposals, a subsidiary is defined as a business entity over which another entity holds ownership or control through direct corporate association. This definition aligns with CARB’s Cap-and-Invest program and is detailed in California Code Regulations, Title 17, Section 95833. Key indicators of ownership and control include majority ownership, majority board or officer control or majority voting rights. A direct corporate association exists when two entities are connected either directly or through a chain of corporate associations.
CARB’s FAQs further clarify that foreign parent companies may file consolidated reports for their in-scope U.S.-based subsidiaries (FAQ 14). Additionally, these consolidated reports can include disclosures from subsidiaries that are out of scope (FAQ 16).
Exemptions
CARB’s proposals include exemptions for certain entities from the reporting requirements. For example, entities whose only presence in California consists of teleworking employees would be exempted.
Additionally, SB 261 explicitly exempts business entities regulated by the California Department of Insurance or similar state agencies. CARB is also proposing to extend this exemption to these entities under SB 253.
According to CARB’s FAQs, some organizations may not have reporting obligations based on how revenue and business activities in California are defined. Holding companies and mutual funds are cited as examples, as they typically do not report gross receipts on California corporate tax filings and therefore do not meet the revenue thresholds (FAQ 10).
Furthermore, both SB 253 and SB 261 exclude certain types of organizations by definition, including government entities, not-for-profits and charitable organizations.
Required**
Not required