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Proposed SBA Rule Adopts 2017 NAICS Codes

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Koprince Law LLC

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It is out with the old, in with the new at the U.S. Small Business Administration.

A proposed SBA rule change published Tuesday, April 18, would incorporate the 2017 NAICS code revision into the SBA’s size standards table. If the proposed rule is made final, it will replace SBA’s current size standards table, which SBA has relied on for making size determinations since 2012. The revised size standards table will add 21 new NAICS industries. The revised NAICS code table also will feature larger standards for six industries, smaller standards for two industries, and will switch one size standard from revenue-based to employee-based.

By way of background, NAICS codes are a system for classifying businesses by type of economic activity. In the federal contracting world, NAICS codes are best known for their relationship to small business status, but the government uses NAICS codes for many other purposes, as well. The U.S. Office of Management and Budget has revised NAICS codes every five years since the system was adopted in 1997. OMB’s most recent revision came last summer.

OMB revisions do not automatically apply to SBA, which uses NAICS codes as the basis of its size standards table under 13 C.F.R. 121.201. The SBA’s current size standards table is based on the 2012 NAICS codes.

SBA now proposes to update its size standards table to use OMB’s 2017 NAICS code revision. The new NAICS codes will not only update the size-standards associated with existing codes, but also will create 21 new industries by reclassifying, combining, or splitting 29 existing industry codes. Only one new industry would be formed by designating part of an existing industry as a separate industry. No new codes would be created out of whole cloth.

Below is a summary of the most significant proposed changes:

INCREASED:

211112 (Natural Gas Liquid Extraction) / 750 employees to 1,250 employees
335222 (Household Refrigerator and Home Freezer Manufacturing) / 1,250 employees to 1,500 employees
335224 (Household Laundry Equipment Manufacturing) / 1,250 employees to 1,500 employees
335228 (Other Major household Appliance Manufacturing) / 1,000 employees to 1,500 employees
452112 (Discount Department Stores pt: Insignificant perishable grocery sales only) / $29.5 million to $32.5 million
454111 (Electronic Shopping) / $32.5 million to $38.5 million

DECREASED:

212234 (Copper Ore and Nickel Ore Mining) / 1,500 employees to 750 employees
512220 (Integrated Record Production/Distribution) / 1,250 employees to 250 employees

MEASUREMENT CHANGED:

512210 (Record Production) / $7.5 million to 250 employees

All of these changes would be the result of merging codes together. For example, current code 211112 (Natural Gas Liquid Extraction) will be merged with 211111 (Crude Petroleum and Natural Gas Extraction) to create code 211130 (Natural Gas Extraction). The move will increase the size of 211112 (Natural Gas Liquid Extraction) from 750 employees to 1,250. SBA estimates this change would result in an additional 4-6 firms qualifying as small businesses.

SBA also proposes to merge four NAICS codes related to appliance manufacturing into one, adopting the size standard of the largest of the four, thereby increasing the size of three codes at once. NAICS codes 335221 (Household Cooking Appliance Manufacturing), 335222 (Household Refrigerator and Home Freezer Manufacturing), 335224 (Household Laundry Equipment Manufacturing), and 335228 (Other Major household Appliance Manufacturing) will all become 335220 (Major Household Appliance Manufacturing) with a corresponding size standard of 1,500 employees. Currently, codes 335222 (Household Refrigerator and Home Freezer Manufacturing), 335224 (Household Laundry Equipment Manufacturing), and 335228 (Other Major household Appliance Manufacturing) have smaller size standards: 1,250, 1,250, and 1,000 respectively.

SBA did not say how many large businesses would become small based on the change, but said that 77 percent of the businesses in the appliance manufacturing field operate in 335221 (Household Cooking Appliance Manufacturing) and that therefore decreasing the size of that code would cause four known firms to lose their small business size status. What SBA did not say is that, after the change, 1,500 employee-sized businesses in the Appliance Manufacturing code would be able to compete for contracts that would have previously been set aside under the smaller refrigerator, laundry or other codes.

The rule change would also increase the size of 452112 (Discount Department Stores pt: Insignificant perishable grocery sales only) from $29.5 million to $32.5 million by merging it into code 452111 (Department Stores (except Discount Department Stores)) to create 452210 (Department Stores). SBA notes that the impact of this change will be negligible as wholesale and retail contracts are classified under a manufacturing or supply code and generally an offeror has to meet the 500-employee standard of the non-manufacturer rule in order to be eligible as a small business.

The final increased size standard would be NAICS code 454111 (Electronic Shopping) which is proposed to merge with 454112 (Electronic Auctions) and 454113 (Mail-Order Houses) to create 454110 (Electronic Shopping and Mail Order Houses). The size of 454111 would increase from $32.5 million to $38.5 million to match the other codes in the new 454110. SBA said reducing the size of the other two codes would not be feasible as it would result in 80 businesses having their small business status stripped. But SBA did not estimate how many currently large businesses under 454111 would be small as a result of the change.

As for the two NAICS codes that would be decreased in size, the first is a mining code. The rule would decrease the size standard of code 212234 (Copper Ore and Nickel Ore Mining) from 1,500 employees to 750 employees by merging it with 212231 (Lead Ore and Zinc Mining) to create code 212230 (Copper, Nickel, Lead, and Zinc Minding). Code 212231 (Lead Ore and Zinc Mining) currently has a size standard of 750. According to the SBA, increasing the size of 212234 would not be an option, because it would make virtually every business operating in that code–including dominant ones–into small businesses. But, the SBA says, reducing the size of 212234 would only make one formerly small firm into a large one.

Finally, the merging of 512220 (Integrated Record Production/Distribution) and 512210 (Record Production) into 512250 (Record Production and Distribution) would decrease the size of 512220 from 1,250 employees to 250 employees and swap 512210 from $7.5 million to 250 employees. According to the SBA, retaining the 1,250 employee standard of 512220 would have resulted in all but one business in the industry being small. As proposed, however, SBA says that two current businesses under 512220 would become large. Meanwhile, three businesses currently large under 512210’s $7.5 million standard (with average revenues between $52 million and $213 million) would become small under the 250 employee standard. Further, the change would remove the earnings cap from all businesses operating in the 512210 code.

The SBA is asking for comments on the proposed rule before June 19 and seeks to adopt the rule on October 1, 2017.


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