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Q: The California Air Resources Board put our company on a preliminary list of businesses subject to climate reporting under SB 253 and SB 261. But we thought we were not a covered entity. Who is right?
A: There are at least three answers to this question. First, the introduction to the list says that it does not reflect potential exemptions discussed by CARB and that each potentially covered entity remains responsible for making its own compliance determination. That determination presumably could include a conclusion that the company is not a covered entity. CARB has emphasized throughout the regulatory process that good faith efforts to comply will be treated leniently. It is a best practice for companies that are on the list but believe that they are not covered entities to document the basis for that belief to provide to CARB in the event that there is a future knock on the door.
The second answer is that CARB used the wrong source of information to identify potentially covered entities. CARB used a Secretary of State database to identify entities doing business in California. The legislative history was clear that the test for "doing business" in California should be the one used for tax purposes. CARB elected not to use that list due to privacy issues.
The third answer is that CARB's list appears to rely substantially on consolidated financial statements. The law is clear, though, that consolidation is optional and not mandatory. It is conceivable that none of the entities in a corporate family would individually have revenue above the statutory threshold while the consolidated revenue for all the entities would exceed it. CARB does not appear to have considered this possibility.
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