Contrary to common misconception, a contractor’s small business status under a receipts-based size standard ordinarily is based on the contractor’s last three completed fiscal years–not the last three completed fiscal years for which the contractor has filed a tax return.
In a recent size appeal decision, the SBA Office of Hearings and Appeals confirmed that a contractor cannot change the relevant three-year period by delaying filing a tax return for the most recently completed fiscal year.
OHA’s decision in Teracore, Inc., SBA No. SIZ-5830 (2017) involved the major DHS PACTS II solicitation for IT support services. The solicitation was set aside for SDVOSBs and contemplated the award of numerous IDIQ contracts. Functional Category 1, which pertained to program management and technical services, was assigned NAICS code 541611 (Administrative Management and General Management Consulting Services), with a corresponding $14 million size standard.
On July 11, 2014, Teracore, Inc. submitted a proposal, self-certifying as an SDVOSB. At that time, Teracore’s 2013 fiscal year had ended, but Teracore had not yet filed its 2013 tax return.
In February 2017–about two-and-a-half years after Teracore submitted its proposal–the DHS announced that Teracore would be awarded a contract under Functional Category 1. Two competitors subsequently filed protests challenging Teracore’s size under the $14 million size standard.
The SBA Area Office asked Teracore to produce its 2013 tax return, even though that tax return had not yet been filed on July 11, 2014. The SBA Area Office then calculated Teracore’s size using Teracore’s 2011, 2012, and 2013 tax returns. The SBA Area Office determined that Teracore exceeded the $14 million size standard, and was ineligible for award.
Teracore filed a size appeal with OHA. Teracore argued that the 2013 tax return was not available until October 2014, several months after Teracore self-certified as small for the PACTS II solicitation. Teracore argued that the SBA Area Office should have calculated Teracore’s receipts using the company’s 2010, 2011, and 2012 tax returns.
Under the SBA’s regulations at 13 C.F.R. 121.104(b)(1), “[a]nnual receipts of a concern that has been in business for three or more completed fiscal years means the total receipts of the concern over its most recently completed three fiscal years divided by three.” Further, 13 C.F.R. 121.104(a)(2) specifies that where a company has not yet filed a tax return for a particular year, “SBA will calculate the concern’s annual receipts for that year using any other available information,” such as books of account, financial statements, or even “information contained in an affidavit by a person with knowledge of the facts.”
In this case, OHA wrote that because Teracore self-certified as small in July 2014, “the proper period of measurement for computing [Teracore’s] receipts is from 2011 to 2013–‘the most recently completed three fiscal years’ immediately preceding self-certification.” Although Teracore’s 2013 tax return had not yet been filed when Teracore submitted its proposal, “the unavailability of a tax return does not alter the period of measurement, but instead requires the consideration of ‘other available information.'”
Of course, by the time the SBA evaluated Teracore’s size in 2017, Teracore had filed its 2013 tax return. OHA held that it was appropriate for the SBA Area Office to consider the tax return, even though it had been filed after the July 2014 self-certification. “At a minimum,” OHA wrote, “the Area Office could properly consider a tax return filed after the date of self-certification to be ‘other available information’ which can be used to calculate size.”
OHA denied Teracore’s size appeal, and affirmed the SBA Area Office’s size determination.
In my experience, contractors who are approaching a size standard ceiling often think–like Teracore–that they can affect the relevant three-year period by delaying filing a tax return. Nope. As the Teracore size appeal demonstrates, the SBA doesn’t decide which three-year period to use based on whether tax returns have been filed, but rather based on whether the fiscal year has been completed.