How to Determine Whether Your Company Must Comply with California’s Transparency in Supply Chains Act

The Michael Scott Explanation of California Transparency in Supply Chains Act leaves many questions unanswered not the least of which is how to determine whether the Act applies to a particular business.  To determine whether your company must comply with the Act, you need only ask a few questions.

1. Is the company a retail seller or manufactuer? The Act defines both terms.  See Cal. Civ. Code Sections 1714.32(a)(2)(C) and (D), below.
2. Does the company have worldwide annual revenue sales (gross receipts) of at least $100 million?  If not, you do not need to comply with the act.  If so, proceed to the next question.
3. Is the company doing business in the State of California?  The answer to this question depends on the answers to the following questions which are based on Cal. Rev. & Tax Code Sec. 23101. 

• (1) The [company] is organized or commercially domiciled in this state.  Cal. Rev. & Tax Code Sec. 23101(b)(1).   Obviously, it you are a California corporation or other business entity or are based in California, you’re doing business in the state.
• (2) Sales of the company in California exceed the lesser of five hundred thousand dollars ($500,000) or 25 percent of the taxpayer’s total sales.  Cal. Rev. & Tax Code Sec. 23101(b)(2).   This includes sales by an agent or independent contractor of the taxpayer.  There are a few more rules for determining and calculating sales set forth in the statute.
• (3) The real property and tangible personal property of the company in California exceed the lesser of fifty thousand dollars ($50,000) or 25 percent of the taxpayer’s total real property and tangible personal property.   Cal. Rev. & Tax Code Sec. 23101(b)(3).   Again, there are some further rules in the statute that provide instructions on making this calculation.
• (4) The amount paid in California by the company for compensation of employees, (wages, salaries, commissions and any other form of remuneration paid to employees), exceeds the lesser of fifty thousand dollars ($50,000) or 25 percent of the total compensation paid by the company.    Cal. Rev. & Tax Code Sec. 23101(b)(4).   This of course requires a review of the payroll records.

These requirements under Section 23101(b) are in the disjunctive. That means that if your company meets any one of these standards, it is doing business in California for purposes of the Act.  On the other hand, even if a company is doing business in California but has sales under $100 million, it is not covered by the Act. 

There are a few other things to note in making this applicability determination.  Disregard all pass through entities for purposes of doing these revenue and compensation calculations.  See Cal. Rev. & Tax Code Section 23101(d).  One shortcut for making these revenue, property and compensation determinations is to consult with accountants and tax lawyers who should already be advising on tax issues as the same analysis is applied to determine whether taxes are due to California applies here. 

Here is the text of the entire law.

Cal. Civ. Code Sec. 1714.43.  (a) (1) Every retail seller and manufacturer doing business in this state and having annual worldwide gross receipts that exceed one hundred million dollars ($100,000,000) shall disclose, as set forth in subdivision (c), its efforts to eradicate slavery and human trafficking from its direct supply chain for tangible goods offered for sale.

   (2) For the purposes of this section, the following definitions shall apply:

   (A) “Doing business in this state” shall have the same meaning as set forth in Section 23101 of the Revenue and Taxation Code.

   (B) “Gross receipts” shall have the same meaning as set forth in Section 25120 of the Revenue and Taxation Code.

   (C) “Manufacturer” means a business entity with manufacturing as its principal business activity code, as reported on the entity’s tax return filed under Part 10.2 (commencing with Section 18401) of Division 2 of the Revenue and Taxation Code.

   (D) “Retail seller” means a business entity with retail trade as its principal business activity code, as reported on the entity’s tax return filed under Part 10.2 (commencing with Section 18401) of Division 2 of the Revenue and Taxation Code.

   (b) The disclosure described in subdivision (a) shall be posted on the retail seller’s or manufacturer’s Internet Web site with a conspicuous and easily understood link to the required information placed on the business’ homepage. In the event the retail seller or manufacturer does not have an Internet Web site, consumers shall be provided the written disclosure within 30 days of receiving a written request for the disclosure from a consumer.

   (c) The disclosure described in subdivision (a) shall, at a minimum, disclose to what extent, if any, that the retail seller or manufacturer does each of the following:

   (1) Engages in verification of product supply chains to evaluate and address risks of human trafficking and slavery. The disclosure shall specify if the verification was not conducted by a third party.

   (2) Conducts audits of suppliers to evaluate supplier compliance with company standards for trafficking and slavery in supply chains. The disclosure shall specify if the verification was not an independent, unannounced audit.

   (3) Requires direct suppliers to certify that materials incorporated into the product comply with the laws regarding slavery and human trafficking of the country or countries in which they are doing business.

   (4) Maintains internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking.

   (5) Provides company employees and management, who have direct responsibility for supply chain management, training on human trafficking and slavery, particularly with respect to mitigating risks within the supply chains of products.

   (d) The exclusive remedy for a violation of this section shall be an action brought by the Attorney General for injunctive relief. Nothing in this section shall limit remedies available for a violation of any other state or federal law.

   (e) The provisions of this section shall take effect on January 1, 2012.