USA – CALIFORNIA Trends and Developments Contributed by: Bradley Rose and Clint Mead, Kaye, Rose and Partners LLP
“‘Reporting entity’ means a partnership, corpora - tion, limited liability company, or other business enti - ty formed under the laws of this state, the laws of any other state of the United States or the District of Columbia, or under an act of the Congress of the United States with total annual revenues in excess of one billion dollars ($1,000,000,000) and that does business in California. Applicability shall be deter - mined based on the reporting entity’s revenue for the prior fiscal year.” If an entity is organised under the laws of a foreign jurisdiction, even if it has offices in the US or con - ducts a significant amount of business in California or the US, it does not need to comply with the require - ments of the Acts. Most shipping companies, as for- eign businesses, are not subject to the requirements of the Acts. The California legislature would need to amend the Acts if it wanted to apply them to foreign companies, as the legislation is clear and this is not within CARB’s discretionary rule-making implementation of the Acts. While CARB was asked during a recent meeting if there have been discussions about applying the Acts to foreign companies which do business in California, no answer was given other than that the legislation currently only applies to domestic companies. Companies with US subsidiaries will need to deter - mine if such subsidiary is a “reporting entity” for purposes of the Acts; however, the 500-million- dollar (USD500,000,000) and one-billion-dollar (USD1,000,000,000) thresholds are assessed for each individual subsidiary only, and the parent company’s revenue is not considered. CARB has published a preliminary list of companies that may be subject to the Acts on its website . Most international shipping companies are not included in this provisional list as they are foreign entities. How - ever, inclusion in or exclusion from the preliminary list should not be relied on as a definitive determination,
the interpretation of “doing business in California” as found in the California Revenue and Tax Code Section 23101, which defines “doing business in California” as actively engaging in any transaction for the purpose of financial or pecuniary gain or profit and either: • the entity is organised or commercially domiciled in California during any part of a reporting year; • the entity has sales in California during the report - ing year exceeding the inflation adjusted threshold of USD735,019 (2024); or • the entity’s sales in California exceed 25% of the entity’s total sales. The definition of “sales” includes sales by an agent or independent contractor of the entity (California Rev - enue and Tax Code Section 23101 (b)). Revenue CARB will primarily rely on filings with the California Franchise Tax Board (FTB) to identify business entities which are covered under the statutes. Interest and investment income should not be included as it does not correlate with GHG emissions. Total annual rev - enue will be defined as “gross receipts” as set forth in the California Revenue and Taxation Code (RTC) Sec - tion 25120 (f)(2). Section 25120 defines “revenue” as: “The gross amounts realized (the sum of money and the fair market value of other property or services received) on the sale or exchange of property, the per - formance of services, or the use of property or capital (including rents, royalties, interest, and dividends) in a transaction that produces business income, in which the income, gain, or loss is recognized (or would be recognized if the transaction were in the United States) under the Internal Revenue Code, as applica - ble for purposes of this part. Amounts realized on the sale or exchange of property shall not be reduced by the cost of goods sold or the basis of property sold.” The qualifying annual revenue thresholds for covered business entities are substantial, so depending on how close an entity’s qualifying revenues come to meeting the threshold amount should guide its fur - ther handling and preparation in meeting the reporting requirements. CARB has noted that it intends to use the lesser of an entity’s last two years’ revenue, as
only as an initial guideline. Doing business in California
The terminology “doing business in California” is not defined in either of the statutes. CARB intends to use
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