[Federal Register Volume 67, Number 191 (Wednesday, October 2, 2002)]
[Proposed Rules]
[Pages 61829-61836]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-24919]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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 

  Federal Register / Vol. 67, No. 191 / Wednesday, October 2, 2002 / 
Proposed Rules  

[[Page 61829]]



SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245-AE98


Small Business Size Standards; Tour Operators

AGENCY: U.S. Small Business Administration (SBA).

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Small Business Administration (SBA) proposes to modify the 
way average annual receipts are calculated for firms in the Tour 
Operators industry (North American Industry Classification System 
(NAICS) 561520). This would exclude funds received in trust for 
unaffiliated third parties from the calculation of a tour operator's 
receipts. SBA would retain the size standard figure of $6.0 million.

DATES: Comments must be received on or before November 1, 2002.

ADDRESSES: Comments to Gary M. Jackson, Assistant Administrator for 
Size Standards, 409 3rd Street, SW., Mail Code 6530, Washington, DC 
20416; or via email to [email protected]. Upon request, SBA will 
make all public comments available.

FOR FURTHER INFORMATION CONTACT: Robert Ray, Office of Size Standards, 
(202) 205-6618.

SUPPLEMENTARY INFORMATION: SBA has received requests from tour 
operators and an industry association to review the size standard for 
the Tour Operators industry (NAICS 561520). These organizations request 
that SBA exclude from the calculation of a tour operator's average 
annual receipts monies passed through to suppliers of travel components 
(i.e., meals; ground, air, and rail transportation; lodging; and 
sightseeing and entertainment). These monies typically account for a 
majority of a tour operator's receipts.
    Under SBA's Small Business Size Regulations (13 CFR 121.104), the 
receipts of a firm are based on information reported on a firm's 
Federal tax returns. Generally, receipts reported to the Internal 
Revenue Service (IRS) include a firm's gross receipts from the sale of 
goods and services. The petitioners, however, believe that receipts 
collected for payment to the actual transportation and lodging 
providers that are reimbursed by a tour operator should not be included 
in the calculation of average annual receipts for purposes of 
determining the size of a tour operator.
    SBA has evaluated this issue and agrees that certain types of 
receipts should be excluded from the calculation of size for firms in 
this industry. Related to this issue is whether the current size 
standard is appropriate if a significant proportion of receipts is 
excluded from a firm's gross receipts. Based on a review of industry 
data discussed below, SBA believes the current size standard is 
appropriate if size is measured on an adjusted basis rather than by 
gross receipts.
    Accordingly, SBA proposes a revision to the size standard for the 
Tour Operators industry by excluding funds received in trust for 
unaffiliated third parties while retaining the size standard of $6 
million in average annual receipts.

Calculation of Average Annual Receipts

    SBA reviews requests to exclude receipts of certain business 
activities on a case-by-case basis. The structure of this review is 
consistent with past proposed rules on this issue (e.g., freight 
forwarders, 65 FR 48601, dated August 9, 2000, and conference 
management planners, 60 FR 57982, dated January 31, 1996). These 
reviews identify and evaluate five industry characteristics under which 
it might be appropriate to exclude certain funds received and later 
transmitted to an unaffiliated third party as follows:
    1. A broker or agent-like relationship exists between a firm and a 
third party provider which is a dominant or crucial activity of firms 
in the industry;
    2. The pass-through funds associated with the broker or agent-like 
relationship are a significant proportion of the firm's total receipts;
    3. Consistent with the normal business practice of firms in the 
industry, a firm's income remaining after the pass-through funds are 
remitted to a third party is typically derived from a standard 
commission or fee;
    4. Firms in this industry do not normally consider billings that 
are reimbursed to other firms as their own income, preferring instead 
to count only receipts that are retained for their own use; and,
    5. Federal Government agencies which engage in the collection of 
statistics and other industry analysts typically represent receipts of 
the industry's firms on an adjusted receipts basis.
    SBA's review of information obtained on the Tour Operators industry 
finds that these characteristics exist in the industry. The prevalence 
of these characteristics supports the proposal to exclude funds 
received in trust for unaffiliated third parties from the calculation 
of a tour operator's receipts for size standard purposes. The following 
discussion summarizes these findings:

1. Agent-Like Relationship

    The North American Industry Classification System Manual (1997) 
states that this industry encompasses establishments primarily engaged 
in arranging and assembling tours. The tours are sold through travel 
agencies or tour operators. These firms act as agents, ensuring that 
transportation, accommodation and facility providers, and lecturers 
(for whom the funds are collected) are paid. Therefore, the dominant 
activity in this industry involves a broker or agent-like relationship 
with the tour operator passing through funds from customers to 
providers.

2. Pass-Through Funds Are a Significant Proportion of Total Receipts

    It is a normal practice in this industry for the client's bill to 
include charges of the various providers of services and facilities 
which are temporarily held in trust by the tour operator for remittance 
to the third party providers. The charges by the other providers are 
incorporated in the bill to the customer or client. Moreover, these 
remitted funds are typically much larger in size than the tour 
operator's own earnings for arranging the tour. Estimates of these 
pass-through funds range from 80 percent to 95 percent of total 
revenues received by tour operators.

[[Page 61830]]

3. Remaining Income Is Derived From a Standard Commission or Fee

    The tour operator earns income as the balance after compensating 
service providers. This arrangement effectively involves a commission 
or fee for putting together the tour.

4. Firms in This Industry Only Count Receipts Retained for Their Own 
Use

    Firms in this industry do not consider funds collected for third 
parties as their own funds. As discussed above, the role of tour 
operator is to set up the tour, linking customers with the necessary 
services for a successful tour including facilitating the bill, fees, 
and services associated with transportation, accommodation, food 
servicing, and guide information that are paid on behalf of the 
customer. Furthermore, some states, such as California, place 
restrictions on a tour operator's use of funds collected and owed to 
providers. This information indicates that charges for a tour are 
mostly not those of the tour operator.

5. Federal Agencies and Industry Analysts Typically Represent Receipts 
of These Firms on an Adjusted Receipts Basis

    Data from the U.S. Bureau of the Census (Census Bureau) addressing 
how to count receipts in this industry show firm receipts as the 
``DIFFERENCE between the selling price of their tours and the amount 
paid to suppliers' (see Census Form SV-7305). This adjusted receipts 
basis is equivalent to reporting receipts on a commission or fee basis. 
Thus, the Census Bureau recognizes that the normal arrangement in this 
industry is to handle money for others, retaining a fraction on an 
adjusted receipts basis equivalent to a commission or fee. Similarly, 
the credit reporting firm of Dun and Bradstreet also reports receipts 
for firms in this industry by using adjusted income, not gross 
billings.
    Based on these findings, SBA believes that it is appropriate to 
exclude amounts collected on behalf of third parties when calculating 
receipts of businesses in the Tour Operators industry, as SBA presently 
does for real estate agencies, travel agencies, freight forwarders, 
conference management planners, and advertising agencies. More 
specifically, any charges for transportation, food servicing, lodging 
and other direct fees associated with tours for which the tour operator 
holds money in trust for an unaffiliated third party, and to which the 
tour operator does not have a claim of right, would be excluded from 
gross receipts. Only the difference between the selling price of the 
tour and the amount paid the suppliers would be attributable to the 
tour operator. All other sources of income, such as selling 
merchandise, must also be included in the calculation of a tour 
operator's receipts.

Size Standard for the Tour Operators Industry

    The changed definition of receipts would effectively increase the 
current $6.0 million size standard. A firm with receipts exclusive of 
pass-throughs to third parties of $6.0 million would be equivalent to a 
firm with gross billings of $30 million (assuming 80 percent of 
billings were paid to third parties). Accordingly, SBA believes it is 
necessary to review the size standard along with its proposal to allow 
exclusions for pass-through funds. The following discussion describes 
SBA's size standards methodology and the evaluation of data on the Tour 
Operators industry, as well as other industries for comparison 
purposes.

Size Standards Methodology

    Industry Analysis: The Small Business Act requires that size 
standards vary by industry to the extent necessary to reflect differing 
industry characteristics (Section 3(a)(3)). SBA has in place two ``base 
or anchor size standards'' that apply to most industries--500 employees 
for manufacturing industries and $6 million for nonmanufacturing 
industries. SBA established 500 employees as the anchor size standard 
for the manufacturing industries at SBA's inception in 1953 and shortly 
thereafter established a $1 million size standard for the 
nonmanufacturing industries. The receipts-based anchor size standard 
for the nonmanufacturing industries has been periodically adjusted for 
inflation so that, currently, the anchor size standard for the 
nonmanufacturing industries is $6 million. Anchor size standards are 
presumed to be appropriate for an industry unless its characteristics 
indicate that larger firms have a much greater significance within that 
industry than for the typical industry with an anchor size standard.
    When evaluating a size standard, the characteristics of the 
specific industry under review are compared to the characteristics of a 
group of industries, referred to as a comparison group. A comparison 
group is a large number of industries grouped together to represent the 
typical industry. It can be comprised of all industries, all 
manufacturing industries, all industries with receipt-based size 
standards, or some other logical grouping. If the characteristics of a 
specific industry are similar to the average characteristics of the 
comparison group, then the anchor size standard is considered 
appropriate for the industry. If the specific industry's 
characteristics are significantly different from the average 
characteristics of the comparison group, a size standard higher or, in 
rare cases, a size standard lower than the anchor size standard may be 
considered appropriate. The larger the differences between the specific 
industry's characteristics and the comparison group, the larger the 
difference between the appropriate industry size standard and the 
anchor size standard. Only when all or most of the industry 
characteristics are significantly smaller than the average 
characteristics of the comparison group, or other industry specific 
considerations strongly suggest the anchor size standard would be an 
unreasonably high size standard for the industry under review, will SBA 
adopt a size standard below the anchor size standard.
    In 13 CFR 121.102 (a) and (b), evaluation factors are listed which 
are the primary factors describing the structural characteristics of an 
industry--average firm size, distribution of firms by size, start-up 
costs, and industry concentration. The analysis also often examines a 
fifth factor--the possible impact of a size standard revision on SBA's 
programs. The SBA generally considers these five factors to be the most 
important evaluation factors in establishing or revising a size 
standard for an industry. However, it will also consider and evaluate 
other information that it believes relevant to the decision on a size 
standard as the situation warrants for a particular industry. Public 
comments submitted on proposed size standards are also an important 
source of additional information that SBA closely reviews before making 
a final decision on a size standard. Below is a brief description of 
each of the five evaluation factors.
    1. Average firm size is simply total industry receipts (or number 
of employees) divided by the number of firms in the industry. If the 
average firm size of an industry is significantly higher than the 
average firm size of a comparison industry group, this fact would be 
viewed as supporting a size standard higher than the anchor size 
standard. Conversely, if the industry's average firm size is similar 
to, or significantly lower than that of the comparison industry group, 
it would be a basis to adopt the anchor size standard or, in rare 
cases, a lower size standard.
    2. The distribution of firms by size examines the proportion of 
industry receipts, employment or other economic

[[Page 61831]]

activity accounted for by firms of different sizes in an industry. If 
the preponderance of an industry's economic activity is by smaller 
firms, this tends to support adoption of the anchor size standard. The 
opposite is the case for an industry in which the distribution of firms 
indicates that economic activity is concentrated among the largest 
firms in an industry. In this rule, the SBA is comparing the size of 
firm within an industry to the size of firm in the comparison group at 
which predetermined percentages of receipts are generated by firms 
smaller than a particular size firm. For example, for tour operators, 
50 percent of total industry receipts are generated by firms of $4.4 
million in adjusted receipts and less. This contrasts with the 
comparison group (composed of industries having a $6 million size 
standard) in which firms of $5.8 million or less in receipts on average 
generated 50 percent of total industry receipts. Viewed in isolation, 
this somewhat (but not significantly) lower figure for tour operators 
suggests that a nonmanufacturer anchor size standard of $6.0 million 
may be warranted. Other size distribution comparisons in the industry 
analysis include 40 percent, 60 percent and 70 percent, as well as the 
50 percent comparison discussed above.
    3. Start-up costs affect a firm's initial size because entrants 
into an industry must have sufficient capital to start and maintain a 
viable business. To the extent that firms entering into an industry 
have greater financial requirements than firms in other industries, the 
SBA is justified in considering a higher size standard. In lieu of 
direct data on start-up costs, SBA is using a proxy measure to assess 
the financial burden for entry-level firms. SBA is using nonpayroll 
costs per establishment as a proxy measure for start-up costs. This is 
derived by first calculating the percent of receipts in an industry 
that are either retained or expended on costs other than payroll costs. 
(The figure comprising the numerator of this percentage is mostly 
composed of capitalization costs, overhead costs, materials costs, and 
the costs of goods sold or inventoried.) This percentage is then 
applied to the average receipts of an establishment (a business entity 
operating at a single location) to arrive at nonpayroll costs per 
establishment. An industry with a significantly higher level of 
nonpayroll costs per establishment than that of the average of the 
comparison group is likely to have higher start-up costs that would 
tend to support a size standard higher than the anchor size standard. 
Conversely, if the industry showed the same, or somewhat lower 
nonpayroll costs per establishment when compared to the comparison 
group of anchor size standard industries, the anchor size standard 
would be considered the appropriate size standard.
    4. Industry competition is assessed by measuring the proportion or 
share of industry receipts obtained by firms that are among the largest 
firms in an industry. In this rule, the SBA compared the proportion of 
industry receipts generated by the four largest firms in the industry--
generally referred to as the ``four-firm concentration ratio--with the 
average four-firm concentration ratio of industries in the comparison 
groups. If a significant proportion of economic activity within the 
industry is concentrated among a few relatively large producers, SBA 
tends to set a size standard higher than the anchor size standard to 
assist firms in a broader size range to compete with firms that are 
larger and more dominant in the industry. In general, however, SBA does 
not consider this to be an important factor in assessing a size 
standard if the four-firm concentration ratio falls below 40 percent 
for an industry under review.
    5. Competition for Federal procurements and SBA Financial 
Assistance. SBA also evaluates the possible impact of a size standard 
on its programs to determine whether small businesses defined under the 
existing size standard are receiving a reasonable level of assistance. 
This assessment most often focuses on the proportion or share of 
Federal contract dollars awarded to small businesses in the industry in 
question. In general, the lower the share of Federal contract dollars 
awarded to small businesses in an industry which receives significant 
Federal procurement revenues, the greater is the justification for a 
size standard higher than the existing one.
    As another factor to evaluate the impact of a size standard on SBA 
programs, the volume of guaranteed loans within an industry and the 
size of firms obtaining loans in its financial assistance programs is 
sometimes assessed to determine whether the current size standard may 
restrict the level of financial assistance to firms in that industry. 
If small businesses receive ample assistance through these programs, or 
if the financial assistance is provided mainly to small businesses much 
lower than the size standard, a change to the size standard 
(especially, if it is already above the anchor size standard) may not 
be appropriate.

Evaluation of Industry Size Standard

    Industry Structure Considerations: The two tables below show the 
characteristics for the Tour Operators industry and for the comparison 
group. (The data for the Tour Operators Industry is based on Census 
data using adjusted receipts in which pass-through receipts are 
excluded.) The comparison group is comprised of all industries with a 
$6 million receipts-based size standards (referred to as the 
nonmanufacturing anchor group). Since SBA's size standards analysis is 
assessing whether the tour operators size standard should be higher 
than the nonmanufacturing anchor size standard, this is the most 
logical set of industries to group together for the industry analysis. 
The data on this comparison group provide an additional perspective on 
the size of firms in related industries and their industry structure. 
SBA examined economic data on these industries from a special 
tabulation of the 1997 Economic Census prepared under contract by the 
U.S. Bureau of the Census, SBA internal loan data bases, and Federal 
contract award data for fiscal years 1999-2000 from the Federal 
Procurement Data Center.
    Table 1 below examines the size distribution of firms. For this 
factor, SBA is evaluating the size of firm that accounts for 
predetermined percentages of total industry receipts (40 percent, 50 
percent, 60 percent and 70 percent). (The size of firm in the Tour 
Operators Industry using Census data derived for the SBA, is based on 
adjusted receipts in which pass-through revenues are excluded.) The 
table shows firms up to a specific size that, along with smaller firms, 
accounts for a specific percentage of total industry receipts. For 
example, tour operators of $2.7 million or less in receipts obtained 40 
percent of total industry receipts. This contrasts with the 
nonmanufacturing anchor group in which firms of $3.2 million or less in 
receipts obtained 40 percent of total industry receipts in the average 
industry.

[[Page 61832]]



   Table 1.--Size Distributions of Firms in the Tour Operators Industry and the Nonmanufacturing Anchor Group
                                          [Data in millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                   Size of firm    Size of firm    Size of firm    Size of firm
                    Category                       at 40 percent   at 50 percent   at 60 percent   at 70 percent
----------------------------------------------------------------------------------------------------------------
Tour Operators..................................            $2.7            $4.4            $8.2           $17.2
Nonmanufacturing Anchor Group...................            $3.2            $5.8           $11.8           $28.0
----------------------------------------------------------------------------------------------------------------

    These data indicate that $6.0 million (exclusive of pass-through 
receipts) is an appropriate size standard for the industry of tour 
operators. At a given coverage level, using pass-through excluded 
receipts for tour operators, the size of firm for the Tour Operators 
industry is moderately lower than the comparison group. Generally, the 
tour operator's figures are about 75 percent to 85 percent of the 
averages for the nonmanufacturer anchor group of industries. These 
relatively small differences between the characteristics of the Tour 
Operators industry and nonmanufacturer anchor group are not sufficient, 
however, to warrant a size standard lower than $6 million.
    Table 2 lists three other evaluation factors for the Tour Operators 
industry and the comparison group. These include comparisons of average 
firm size, start-up costs (as measured by nonpayroll receipts per 
establishment), and the four-firm concentration ratio.

     Table 2.--Industry Characteristics of the Tour Operators Industry and the Nonmanufacturing Anchor Group
----------------------------------------------------------------------------------------------------------------
                                                         Average firm size          Non-payroll
                                                 --------------------------------  receipts per      Four-firm
                    Category                         Receipts                      establishment   concentration
                                                    (millions)       Employees       (million)         ratio
----------------------------------------------------------------------------------------------------------------
Tour Operators..................................           $0.86            12.0           $0.49            7.2%
Nonmanufacturing Anchor Group...................           $0.95            10.6           $0.56           14.4%
----------------------------------------------------------------------------------------------------------------

    For tour operators, average firm size in receipts (exclusion of 
pass through receipts) is only slightly lower than the nonmanufacturing 
anchor group while its average firm size in employees is slightly 
higher. These differences with the comparison group are insignificant 
and support a size standard at the nonmanufacturer anchor level of $6.0 
million. Its nonpayroll receipts per establishment indicator is only 
slightly smaller than the comparison group while its four-firm 
concentration ratio is low, indicating that the industry is not 
dominated by large businesses, similar to the general pattern of the 
nonmanufacturing anchor group. The latter two factors support the other 
factors in indicating that the nonmanufacturer anchor size standard is 
appropriate for tour operators. Overall, all of the industry factors 
reviewed support an anchor size standard of $6 million.
    SBA Program Considerations: SBA also reviews its size standards 
from the relationship with its programs. Tour operators have received 
SBA financial assistance in two programs. Under SBA's 7(a) loan 
program, tour operators obtained 18 loans for $3 million in fiscal year 
(FY) 1999, 25 loans for $4.3 million in FY 2000, and 17 loans for $1.3 
million in FY 2001. All but three of these loans were to Tour Operators 
with fewer than 20 employees, a size that SBA estimates is less than $1 
million in receipts using adjusted receipts as a measure. As a result 
of the terrorist attacks of September 11, 95 tour operators obtained 
Economic Injury Disaster Assistance loans (EIDL) amounting to $8.6 
million. SBA declined, however, 11 EIDL applications from tour 
operators due to their exceeding the current size standard based on 
average annual receipts, but without the exclusion for pass-through 
revenues proposed in this rule. In the case of Federal procurements to 
tour operators, there were no Federal procurements in either FY 1999 or 
FY 2000. Given the low incidence of lending activity in these two 
programs and the absence of Federal procurement for tour services, no 
special consideration beyond the industry analysis is needed on the 
tour operators size standard.
    Overview: Based on a review of the evaluation factors, SBA is 
proposing a $6 million adjusted receipts size standard. All of the five 
industry evaluation factors support a size standard at the size of the 
nonmanufacturing anchor size standard.
    Dominant in Field of Operation: Section 3(a) of the Small Business 
Act defines a small concern as one that is (1) independently owned and 
operated, (2) not dominant in its field of operation and (3) within 
detailed definitions or size standards established by the SBA 
Administrator. The SBA considers as part of its evaluation of a size 
standard whether a business concern at or below a size standard would 
be considered dominant in its field of operation. This assessment 
generally considers the market share of firms at the proposed or final 
size standard, or other factors that may show whether a firm can 
exercise a major controlling influence on a national basis in which 
significant numbers of business concerns are engaged.
    SBA has determined that no firm at or below this size standard for 
the Tour Operators industry would be of a sufficient size to dominate 
its field of operation. The largest firm at the size standard level 
generates less than 0.2 percent of total industry receipts. This level 
of market share effectively precludes any ability for a firm at or 
below the size standard from exerting a controlling effect on this 
industry.
    Alternative Size Standards: SBA considered as an alternative size 
standard the $3 million size standard presently proposed for the 
related Travel Agencies industry (see 67 FR 11881, date March 15, 
2002). That size standard uses adjusted receipts to measure the size of 
a travel agency. As discussed above, all evaluation factors pointed to 
a size standard at the nonmanufacturer anchor size standard

[[Page 61833]]

of $6 million. SBA's policy is to adopt a size standard below $6 
million for a nonmanufacturing industry in rare cases and only when all 
or most of the industry characteristics are significantly smaller than 
the average characteristics of the comparison group, or other industry 
specific considerations strongly suggest the anchor size standard would 
be an unreasonably high size standard for the industry under review. In 
comparison to a travel agency, tour operators generate most of their 
receipts from packaging tours, which have significantly higher receipts 
per transaction than ticketing travel accommodations by travel 
agencies. Tour packages for clients quite often are made for 40 to 60 
individuals and involve a combination of travel, lodging, entertainment 
and other tourist activities. Thus, SBA considers a $3 million size 
standard too low for the Tour Operators industry.
    The SBA welcomes public comments on its size standard for the Tour 
Operators industry. Comments on alternatives, including the option of 
retaining the size standard at $6 million measured in gross receipts as 
discussed above, should present the reasons that would make them 
preferable to the size standard.

Compliance With Executive Orders 12866, 12988, and 13132, the Paperwork 
Reduction Act (44 U.S.C. chapter 35), and the Regulatory Flexibility 
Act (5 U.S.C. 601-612)

    The Office of Management and Budget (OMB) has determined that this 
proposed rule is a ``significant'' regulatory action for purposes of 
Executive Order 12866. Size standards determine which businesses are 
eligible for Federal small business programs. This is not a major rule 
under the Congressional Review Act, 5 U.S.C. 800. For the purpose of 
the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA has determined that 
this rule would not impose new reporting or record keeping 
requirements, other than those required of SBA. For purposes of 
Executive Order 13132, SBA has determined that this rule does not have 
any federalism implications warranting the preparation of a Federalism 
Assessment. For purposes of Executive Order 12988, SBA has determined 
that this rule is drafted, to the extent practicable, in accordance 
with the standards set forth in that order. Our Regulatory Impact 
Analysis follows.

Regulatory Impact Analysis

i. Is There a Need for the Regulatory Action?

    SBA is chartered to aid and assist small businesses through a 
variety of financial, procurement, business development, and advocacy 
programs. To effectively assist intended beneficiaries of these 
programs, SBA must establish distinct definitions of which businesses 
are deemed small businesses. The Small Business Act (15 U.S.C. 632(a)) 
delegates to the SBA Administrator the responsibility for establishing 
small business definitions. It also requires that small business 
definitions vary to reflect industry differences. The supplementary 
information to this proposed rule explains the approach SBA follows 
when analyzing a size standard for a particular industry. Based on that 
analysis, SBA believes that a change in the way receipts are measured 
for businesses in the Tour Operators industry is needed to better 
reflect their size and activities.

ii. What Are the Potential Benefits and Costs of This Regulatory 
Action?

    The most significant benefit to businesses obtaining small business 
status as a result of this rule is eligibility for Federal small 
business assistance programs. Under this rule, 238 additional firms 
generating 21 percent of sales in the industry will obtain small 
business status and become eligible for these programs. These include 
SBA's financial assistance programs, economic injury disaster loans and 
Federal procurement preference programs for small businesses, 8(a) 
firms, small disadvantaged businesses, small businesses located in 
Historically Underutilized Business Zones (HUBZone), women-owned small 
businesses, and veteran-owned and service disabled veteran-owned small 
businesses, as well as those awarded through full and open competition 
after application of the HUBZone or small disadvantaged business price 
evaluation preference or adjustment. Through the assistance of these 
programs, small businesses may benefit by becoming more knowledgeable, 
stable, and competitive businesses.
    Other Federal agencies also use SBA size standards for a variety of 
regulatory and program purposes. However, discussions with industry 
representatives identified no other uses of SBA' tour operators size 
standard. If such a case exists where SBA's size standard is not 
appropriate, an agency may establish its own size standards with the 
approval of the SBA Administrator (see 13 CFR 121.801).
    The benefits of a size standard increase to a more appropriate 
level would accrue to three groups: (1) Businesses that benefit by 
gaining small business status from the higher size standards that also 
use small business assistance programs; (2) growing small businesses 
that may exceed the current size standards in the near future and who 
will retain small business status from the higher size standard; and 
(3) Federal agencies that award contracts under procurement programs 
that require small business status. Although there may be some 
procurements that are awarded tour operators, SBA's research for the 
last two completed fiscal years was unable to find any Federal 
contracting activity in this industry.
    Newly defined small businesses would benefit from the SBA's 7(a) 
Guaranteed Loan Program. SBA estimates that three loans totaling 
approximately $0.6 million in new Federal loan guarantees would be made 
to these newly defined small businesses. This represents 21 percent 
(the percentage increase in coverage of sales in the industry by firms 
under the higher ``real'' size standard) of the $2.9 million yearly 
average in loans that were guaranteed by the SBA in this industry under 
these two financial programs from FY 1999 to FY 2001. These additional 
loan guarantees, because of their limited magnitude, will have 
virtually no impact on the overall availability of loans for SBA's loan 
programs, which have averaged about 50,000 loans totaling more than $12 
billion per year in recent years.
    The newly defined small businesses would also benefit from SBA's 
Economic Injury Disaster Loan (EIDL) Program. Since this program is 
contingent upon the occurrence and severity of a disaster, no 
meaningful estimate of benefits can be projected from future disasters. 
However, for the terrorist attacks of September 11, SBA has declined 11 
applicants based on size. Many of these companies would likely qualify 
if pass-through receipts were excluded from a firm's measure of size in 
this industry. In addition, out of the newly eligible tour operators, 
eight more loans would likely be approved. Based on an analysis of 
September 11 EIDL assistance, this rule may result in $1.4 million to 
$2.7 million in additional loans.
    Federal agencies may benefit from the higher size standards if the 
newly defined and expanding small businesses compete for more set-aside 
procurements. However, the last two

[[Page 61834]]

fiscal years have seen no Federal contracting in the Tour Operators 
industry and there will be no procurement gains from a higher size 
standard in this industry for Federal agencies if this pattern 
continues.
    To the extent that up to 238 additional firms could become active 
in Federal small business programs, this may entail some additional 
administrative costs to the Federal government associated with 
additional bidders for Federal small business procurement programs, 
additional firms seeking SBA guaranteed lending programs, and 
additional firms eligible for enrollment in SBA's PRO-Net data base 
program. Among businesses in this group seeking SBA assistance, there 
could be some additional costs associated with compliance and 
verification of small business status and protests of small business 
status. These costs are likely to generate minimal incremental 
administrative costs since administrative mechanisms are currently in 
place to handle these administrative requirements.
    The costs to the Federal Government may be higher on some Federal 
contracts as a result of this rule. However, any analysis of costs is 
dependent on contracting in this industry and the last two fiscal years 
have had no federal contracting in this industry. SBA is assuming that 
this trend will continue and there will be no contracting activity in 
this industry in the near future.
    SBA believes that there will be no distributional effects among 
large and small businesses, nor will there be any equity or uncertainty 
considerations as a result of this rule. With a small amount of lending 
to tour operators discussed above, it is unlikely that they would be 
denied SBA financial assistance due to a larger pool of eligible small 
businesses. Also, there is little or no Federal contracting in this 
industry to affect current businesses.
    The revision to the current size standard for tour operators is 
consistent with SBA's statutory mandate to assist small business. This 
regulatory action promotes the Administration's objectives. One of 
SBA's goals in support of the Administration's objectives is to help 
individual small businesses succeed through fair and equitable access 
to capital and credit, Government contracts, and management and 
technical assistance. Reviewing and modifying size standards, when 
appropriate, ensures that intended beneficiaries have access to small 
business programs designed to assist them. Size standards do not 
interfere with State, local, and tribal governments in the exercise of 
their government functions. In a few cases, State and local governments 
have voluntarily adopted SBA's size standards for their programs to 
eliminate the need to establish an administrative mechanism to develop 
their own size standards.

Initial Regulatory Flexibility Analysis

    Under the Regulatory Flexibility Act (RFA), this rule, if 
finalized, may have a significant impact on a substantial number of 
small entities engaged in the Tour Operators industry. As described in 
the Regulatory Impact Analysis, this rule may impact small entities 
seeking SBA (7a) Guaranteed Loans or Economic Impact Disaster Loans, 
but it is unlikely to affect SBA's procurement preference programs 
because of the absence of Federal contracting. Newly defined small 
businesses would benefit from the SBA's 7(a) Guaranteed Loan Program. 
SBA estimates that three additional loans totaling approximately $0.7 
million in new Federal loan guarantees could be made to these newly 
defined small businesses. This represents 21 percent (the percentage 
increase in coverage of sales in the industry by firms under the higher 
``real'' size standard) of the $3.7 million yearly average in loans 
that were guaranteed by the SBA in this industry under these two 
financial programs in FY 1999 and FY 2000. These additional loan 
guarantees, because of their limited magnitude, will have virtually no 
impact on the overall availability of loans for SBA's loan programs, 
which have averaged about 50,000 loans totaling more than $12 billion 
per year in recent years.
    The size standard may also affect small businesses participating in 
programs of other agencies that use SBA size standards. As a practical 
matter, however, SBA cannot estimate the impact of a size standard 
change on each and every Federal program that uses its size standards. 
However, discussions with a major tour operators association indicated 
that there are no Federal laws or regulations using SBA's size 
standards for defining small tour operators. In cases where an SBA size 
standard is not appropriate, the Small Business Act and SBA's 
regulations allow Federal agencies to develop different size standards 
with the approval of the SBA Administrator (13 CFR 121.902). For 
purposes of a regulatory flexibility analysis, agencies must consult 
with SBA's Office of Advocacy when developing different size standards 
for their programs. (13 CFR 121.902(b)(4)).
    Immediately below, SBA sets forth an initial regulatory flexibility 
analysis (IRFA) of this rule on the Tour Operators industry addressing 
the following questions: (1) What is the need for and objective of the 
rule, (2) what is SBA's description and estimate of the number of small 
entities to which the rule will apply, (3) what is the projected 
reporting, recordkeeping, and other compliance requirements of the 
rule, (4) what are the relevant Federal rules which may duplicate, 
overlap or conflict with the rule and (5) what alternatives will allow 
the Agency to accomplish its regulatory objectives while minimizing the 
impact on small entities?

(1) What Is the Need for and Objective of the Rule?

    The revision to the size standard for tour operators to exclude 
third party reimbursements more accurately measures the magnitude of 
operations of a tour operator. SBA developed five criteria to assess 
whether businesses in an industry should be allowed to exclude funds 
held in trust for third parties. SBA found that tour operators act as 
agents for their clients by arranging travel and related activities 
provided by third parties. Well over a majority of a tour operator's 
receipts collected from clients are provided to third party providers. 
Therefore, a size standard allowing for the exclusion of third party 
reimbursements is a better measure of a tour operator's size than gross 
receipts.

(2) What Is SBA's Description and Estimate of the Number of Small 
Entities to Which the Rule Will Apply?

    Within the Tour Operators industry, 2,722 businesses out of 3,222 
(84.5 percent) are currently defined as small. Only a small proportion 
of businesses in this industry utilizes SBA programs, almost 
exclusively in the area of financial assistance. For FY 1999 and 2000, 
only 43 loans totaling $7.2 million were made under SBA's 7(a) Program. 
As a result of the terrorist attacks of September 11, SBA made 95 
Economic Injury Disaster Loans totaling $8.6 million.
    SBA estimates 238 additional tour operators would be considered 
small as a result of this rule based on the U.S. Census Bureau's 
special tabulation of the 1997 Economic Census for SBA's Office of Size 
Standards. These businesses would be eligible to seek available SBA 
assistance provided that they meet other program requirements. Firms 
becoming eligible for SBA assistance as a result of this rule 
cumulatively generate $600 million in this industry out of a total of 
$2.8 billion in annual receipts. The small business

[[Page 61835]]

coverage in this industry would increase by 21 percent of total 
industry receipts and by 7.2 percent of the total number of tour 
operators.

(3) What Are the Projected Reporting, Recordkeeping, and Other 
Compliance Requirements of the Rule and an Estimate of the Classes of 
Small Entities Which Will Be Subject to the Requirements?

    A new size standard does not impose any additional reporting, 
recordkeeping or compliance requirements on small entities. Increasing 
size standards expands access to SBA programs that assist small 
businesses, but does not impose a regulatory burden as they neither 
regulate nor control business behavior.

(4) What Are the Relevant Federal Rules Which May Duplicate, Overlap or 
Conflict With the Rule?

    This proposed rule overlaps other Federal rules that use SBA's size 
standards to define a small business. Under Sec.  3(a)(2)(C) of the 
Small Business Act, 15 U.S.C. 632(a)(2)(c), unless specifically 
authorized by statute, Federal agencies must use SBA's size standards 
to define a small business. In 1995, SBA published in the Federal 
Register a list of statutory and regulatory size standards that 
identified the application of SBA's size standards as well as other 
size standards used by Federal agencies (60 FR 57988-57991, dated 
November 24, 1995). SBA is not aware of any Federal rule that would 
duplicate or conflict with establishing size standards. Furthermore, in 
discussions with a major tour operators association, it was not aware 
of any Federal laws or regulations using SBA's size standards for 
defining small tour operators.

(5) What Alternatives Will Allow the Agency To Accomplish Its 
Regulatory Objectives While Minimizing the Impact on Small Entities?

    SBA considered two alternatives to the proposed rule. First, as 
discussed in the preamble, SBA considered as an alternative the $3 
million size standard proposed for the Travel Agencies industry that 
SBA also measures on an adjusted receipts basis. However, an analysis 
of all of the size standards evaluation factors pointed to a size 
standard at the anchor size standard of $6 million. This analysis takes 
into consideration the characteristics of all tour operators and 
provides SBA with a range of sizes that identify the smaller segment of 
businesses in the industry. In light of the meager amount of financial 
assistance to currently defined small tour operators, a size standard 
higher than $3 million will not limit access to credit through SBA's 
financial programs for those tour operators.
    Second, SBA considered retaining gross receipts to measure the size 
of a tour operator and adjusting the size standard to a higher level. 
While possible, SBA believed this action would harm small businesses. 
Under SBA's size regulations (13 CFR 121.104), gross receipts are taken 
from the Federal tax returns reported to the Internal Revenue Service 
(IRS). Many tour operators report gross receipts to the IRS. However, 
some report only commissions and fees. For this industry, two tour 
operators with the same amount of gross receipts could be treated 
differently for small business status due solely to how they report 
receipts on their Federal tax returns. To avoid this inequity, allowing 
exclusions for third party reimbursements will treat all tour operators 
in the same manner regardless of how they file their Federal tax 
returns.
    SBA welcomes comments on other alternatives that minimize the 
impact of this rule on small businesses and achieve the objectives of 
this rule. Those comments should describe the alternative and explain 
why it is preferable to this proposed rule.

List of Subjects in 13 CFR Part 121

    Administrative practice and procedure, Government procurement, 
Government property, Grant programs--business. Loan programs--business, 
Small businesses.
    For the reasons set forth in the preamble, part 121 of title 13 of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

    1. The authority citation for part 121 continues to read as 
follows:

    Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), 644(c) and 
662(5) and Sec. 304, Pub. L. 103-403, 108 Stat. 4175, 4188.

    2. In Sec.  121.201, in the table under ``Small Business Size 
Standards by NAICS Industry,'' under the heading Subsector 561--
Administrative and Support Services, revise the entry 561520 to read as 
follows:


Sec.  121.201  What size standards has SBA identified by North American 
Industry Classification System codes?

* * * * *

             Small Business Size Standards by NAICS Industry
------------------------------------------------------------------------
                                                       Size standards in
                                                           number of
      NAICS codes        NAICS industry descriptions      employees or
                                                           million of
                                                            dollars
------------------------------------------------------------------------
 
                              * * * * * * *
-----------------------
           Subsector 561--Administrative and Support Services
------------------------------------------------------------------------
 
                              * * * * * * *
-----------------------
561520................  Tour Operators...............            \10\ $6
-----------------------
 
                              * * * * * * *
------------------------------------------------------------------------

* * * * *
    3. In Sec.  121.201, in the table under ``Small Business Size 
Standards by NAICS Industry,'' footnote 10 is revised to read as 
follows:
    10. NAICS codes 488510 (part), 531210, 541810, 561510, 561520, and 
561920--as measured by total revenues, but excluding funds received in 
trust for an unaffiliated third party, such as bookings or sales 
subject to

[[Page 61836]]

commissions. The commissions received are included as revenues.

Hector V. Barreto,
Administrator.
[FR Doc. 02-24919 Filed 10-1-02; 8:45 am]
BILLING CODE 8025-01-P