California Climate Disclosure Laws: Key Scoping Concepts in CARB’s Initial Regulation and Related Guidance

On February 26, 2026, the California Air Resources Board (CARB) adopted the California Greenhouse Gas Reporting and Climate Financial Risk Disclosure Initial Regulation (Initial Regulation), implementing the Climate Corporate Data Accountability Act (Senate Bill (SB) 253) and the Climate-Related Financial Risk Act (SB 261), both as amended by SB 219.

The Initial Regulation, as supplemented by CARB’s guidance at its public workshops and its FAQs (CARB FAQs), provides clarity on key scoping concepts for SB 253 and SB 261:

• How “revenue” will be defined and tested
• What it means to be “doing business in California”
• Parent-subsidiary relationships, consolidated reporting and fee allocation

The Initial Regulation must still be submitted to the California Office of Administrative Law in a final regulatory package before it takes effect.

Overview of SB 253 and SB 261

SB 253 (Climate Corporate Data Accountability Act)

SB 253 requires US-based entities with more than $1 billion in total annual revenue that do business in California to publicly disclose their Scope 1, 2 and 3 greenhouse gas emissions on an annual basis. Third-party assurance requirements phase in, with limited assurance for Scope 1 and 2 beginning in 2026, and reasonable assurance for Scope 1 and 2 and limited assurance for Scope 3 beginning in 2030. The first-year reporting deadline is August 10, 2026, and covers Scope 1 and 2 emissions only; Scope 3 disclosure requirements are expected to commence in 2027, subject to further rulemaking.

SB 261 (Climate-Related Financial Risk Act)

SB 261 requires US-based entities with more than $500 million in total annual revenue that do business in California to disclose climate-related financial risks on a biennial basis. SB 261 enforcement is currently paused pursuant to a U.S. Court of Appeals for the Ninth Circuit injunction pending appeal, which is considering whether the law’s disclosure requirements constitute compelled speech under the First Amendment. Oral argument occurred on January 9, 2026, and no ruling has yet been issued. On December 1, 2025, CARB issued an Enforcement Advisory, confirming it would not enforce the initial January 1, 2026 SB 261 compliance deadline, and opened a public docket for voluntary SB 261 submissions (at the time of this publication, approximately 120 entities have filed voluntary SB 261 reports, many linking to or adapting existing TCFD-aligned disclosures from their sustainability reports).

1. Revenue: “Gross Receipts” Test, Using the Lesser of Two Fiscal Years’ Revenue

Adopted Definition

In the Initial Regulation, CARB reverted to the “revenue” definition it originally put forward at its first public workshop, which is based on the “gross receipts” concept in section 25120(f)(2) of the California Revenue and Taxation Code (California Tax Code). In substance, this means that revenue is:

• Based on gross amounts realized (sum of money and fair market value of other property or services received) from (i) sale or exchange of property, (ii) performance of services, or (iii) use of property or capital (including rents, royalties, interest and dividends);
• Tied to what is recognized (or would be recognized if the transaction were in the United States) as income, gain or loss under the Internal Revenue Code (IRC); and
• Not reduced by the cost of goods sold or the basis of property sold.

In its most recent public workshop, CARB emphasized that this approach is intended to be objective and familiar because many in-scope entities already apply the gross receipts standard in California corporate tax filings. It further noted that gross receipts are verifiable in California Franchise Tax Board (FTB) filings, referencing specific line items in such filings (i.e., Schedule F, Line 1a of corporation and S-corporation tax filings on Form 100 and Form 100S, respectively; Line 1a of partnership tax filings on Form 565; and Schedule B, Line 1a of LLC tax filings on Form 568) as showing the amount of “gross receipts or sales.”

Revenue is calculated using total gross receipts regardless of whether they are generated inside or outside of California, and is tested based on the lesser of the entity’s two previous completed fiscal years of revenue, which means that:

• If revenue exceeds the applicable threshold in both of the prior two completed fiscal years, the entity is in scope.
• If revenue falls below the threshold in either of the prior two completed fiscal years, the entity is not in scope.

As clarified in the CARB FAQs, revenue thresholds are generally assessed on an entity‑by‑entity basis, except that if a parent and its subsidiaries file California taxes as a unitary group, the subsidiaries’ gross receipts are included in the parent’s gross receipts for threshold calculation purposes. CARB flagged that certain entities (e.g., certain holding companies and mutual funds) may not meet the revenue threshold because they do not report gross receipts in their California tax filings.

Practical Implications

• Scoping will require bridging GAAP revenue to CARB’s “gross receipts” definition, including non-operating income streams (e.g., interest, dividends and certain gains) and ensuring that the cost of goods sold and the basis of property sold are not netted out.
• For entities near the revenue threshold with variable results, the two-year “lesser-of” test can be outcome-determinative.
• Entities that historically treat themselves as holding companies should confirm how they report to the FTB before assuming they are outside the regime.

2. “Doing Business in California”: Sales-Based Nexus, Without Property or Payroll

Adopted Definition

In one of its public workshops, CARB had proposed to define entities “doing business in California” as those with an “active” status in the California Secretary of State Business Entity database. In the Initial Regulation and the last workshop, however, CARB reverted to using a definition based on section 23101 of the California Tax Code similar to the one proposed in its initial public workshop, citing concerns that the California Secretary of State database is incomplete or outdated. CARB’s adopted definition is narrower than the underlying tax statute and provides that an entity is “doing business in California” if it:

• Is actively engaged in transactions for the purpose of financial or pecuniary gain or profit; and
• Meets one of the following criteria during any part of the taxable year:
  • Is organized or commercially domiciled in California; or
  • Its California sales (including those made through agents or independent contractors) exceed the lesser of $757,070 (for 2025, inflation adjusted annually) or 25% of total sales.

Notably, the Initial Regulation does not import the property-based or payroll-based nexus tests from section 23101(b)(3)-(b)(4) of the California Tax Code, under the rationale that property or payroll alone may not demonstrate a “significant economic nexus” within California to justify inclusion under SB 253 and SB 261.

Entities can verify whether they meet the California sales-based threshold by referencing Schedule R-1 (column (b)) of their California FTB tax filings (i.e., Form 100, Form 100S, Form 565 and Form 568 for corporations, S-corporations, partnerships and LLCs, respectively).

The Initial Regulation adopts the following exemptions from SB 253 and SB 261 reporting requirements:

• Non-profit or charitable organizations that are tax-exempt under the IRC;
• Entities whose only business in California is employee compensation or payroll expenses, including teleworking employees;
• Entities whose only activity within California consists of wholesale electricity transactions;
• Entities excluded by statute, such as federal, state and local government entities, and companies that are more than 50% owned by government entities; and
• Business entities that are either regulated by the California Department of Insurance (CDI) or engaged in the business of insurance in any other state. Notably, in the Initial Regulations, CARB extended the insurance exemption to SB 253 (it originally covered only SB 261), but it conditioned final adoption on CARB staff coordinating with CDI to assess whether CDI’s existing climate reporting requirements are sufficient, with CARB to propose future regulatory requirements for insurance companies under SB 253 if they are not.

Practical Implications

• The shift away from property/payroll nexus is significant for asset-heavy but low-sales structures (e.g., some real estate vehicles or holding companies with limited operating revenue), which may fall outside the “doing business in California” test despite owning California assets or employing staff in California.
• Scoping will lean on California sales as reported for tax purposes, requiring coordination with finance and tax teams, which must ensure California-sourced sales (including sales via agents or independent contractors) are captured correctly and can be demonstrated at the entity level, especially for multistate or multinational groups.
• In the fund context, the “doing business in California” analysis presents additional complexity that CARB has not yet addressed through formal guidance. For funds holding California real estate, for example, a property sale likely generates California-sourced sales sufficient to satisfy the “doing business in California” test (note that all property sales, regardless of location, generate gross receipts that fall under the revenue threshold discussed previously). However, for funds holding equity stakes in portfolio companies, the analysis is less clear. Under California’s general apportionment rules, proceeds from a stock sale are typically sourced to the commercial domicile of the selling entity rather than the portfolio company’s location, which could mean that a fund domiciled outside California falls outside the “doing business in California” test, even on a stock sale of a California-headquartered portfolio company, though the analysis may differ depending on the specific fund structure and domicile. Entities should seek specific advice given the absence of CARB guidance on this point.

3. Parent-Subsidiary Relationships, Consolidated Reporting, Fee Allocation

Adopted Treatment of Parent-Subsidiary Relationships

The Initial Regulations define a “subsidiary” as a business entity that another entity owns or controls by “direct corporate association”, using one of the following tests:

• >50% ownership of any class of listed shares (including rights or options to acquire such shares);
• >50% common owners, directors or officers;
• >50% of voting power;
• >50% of partnership interests (for non-limited partnerships);
• >50% control over the general partner or >50% voting rights to select the general partner (for limited partnerships); or
• >50% ownership interest in a limited liability company, regardless of how the interest is held.

This is noticeably broader than a simple equity-ownership test and can pull in entities with overlapping governance, not just majority economic ownership.

Consolidated Reporting and Fee Allocation

The CARB FAQs clarified that scoping criteria are assessed at the individual entity level, even within a group:

• A US parent with a California subsidiary is not automatically “doing business in California”. The parent must independently:
  • Exceed the relevant revenue threshold; and
  • Meet the “doing business in California” criteria.
• A subsidiary that meets the thresholds is in scope even if its parent is not, and vice versa.

A foreign parent that is not US-based or a US-based parent that is not itself subject to SB 253 and/or SB 261 may choose to submit a consolidated report covering in-scope subsidiaries. Parent-level consolidated reports are permitted under both SB 253 and SB 261, so long as the report fully covers all in-scope subsidiaries. Notably, a consolidated report may also include disclosures from subsidiaries that are not themselves in scope for SB 253 and/or SB 261, provided the report still meets all applicable reporting requirements for the in-scope entities it covers. This allows corporate groups that prefer a single unified disclosure (covering all affiliates regardless of individual threshold status) to do so under a single filing.

While a parent may submit a consolidated report on behalf of in‑scope subsidiaries, CARB has emphasized that fee obligations are determined separately for each legal entity — i.e., a parent entity will be invoiced based on the total number of in-scope entities in its corporate structure. With the adoption of the Initial Regulation, CARB has formalized the fee structure but actual fee amounts cannot be finalized until the first round of reports is received because the calculation depends on the total number of reporting entities relative to implementation cost. CARB will issue invoices for SB 253 and SB 261 after covered entities have submitted their initial reports, and has confirmed that it anticipates sending fee assessments on or by September 10, 2026, and annually thereafter. Entities failing to remit the fee to CARB within 60 days of receipt of the fee determination notice are subject to a late fee, the amount of which is yet to be determined.

Practical Implications

• Groups are advised to map (i) legal entity structure, (ii) California tax filing positions (unitary versus separate), and (iii) the distinction between entities that conduct business operations and those that primarily serve as holding companies, to determine both which entity is in scope and which entity can/should report.
• The ability of a non-California-based or foreign parent to file a consolidated report offers operational efficiencies, but does not erase the underlying in-scope status of individual US entities for fee and enforcement purposes.
• It is advisable that internal records address which entity owns the reporting obligation and how fees will be allocated within the group.

Conclusion

With the adoption of the Initial Regulation, CARB has formalized key scoping definitions and fee structures under both SB 253 and SB 261. For SB 253, the August 10, 2026 reporting deadline continues to be in effect. Entities that have not yet confirmed their in-scope status under the adopted definitions of “revenue” and “doing business in California”, or mapped their reporting structure across the corporate group, should do so promptly. For SB 261, while enforcement remains paused pending the Ninth Circuit’s decision, entities may wish to consider whether preparations are sufficiently advanced to respond quickly if the stay is lifted and CARB sets a near-term compliance date. Further rulemaking in 2026 is expected to address, among other items, Scope 3 emissions requirements and assurance obligations under SB 253, and additional compliance timelines.

We will continue to monitor developments under both laws. Please contact our team if you have questions about how SB 253 and SB 261 apply to your organization or need assistance with your compliance planning.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.