[Federal Register Volume 68, Number 248 (Monday, December 29, 2003)]
[Rules and Regulations]
[Pages 74833-74842]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31795]


=======================================================================
-----------------------------------------------------------------------

SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245-AE80


Small Business Size Standards; Information Technology Value Added 
Reseller

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

ACTION: Final rule.

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

SUMMARY: The U.S. Small Business Administration (SBA) is establishing a 
new industry category and size standard of 150 employees for 
Information Technology Value Added Resellers under the industry of 
Other Computer Related Services, North American Industry Classification 
System industry code 541519. This industry category and size standard 
is being established to better apply small business eligibility 
requirements under Federal contracts that combine substantial services 
with the acquisition of computer hardware and software.

DATES: This rule is effective on January 28, 2004.

FOR FURTHER INFORMATION CONTACT: Gary Jackson, Assistant Administrator 
for Size Standards, at (202) 205-6464 or [email protected].

SUPPLEMENTARY INFORMATION: On July 24, 2002, the SBA proposed to 
establish a size standard for businesses described as Information 
Technology Value Added Resellers (ITVAR) (67 FR 48419). Under the North 
American Industry Classification System (NAICS), value added resellers 
are classified in the Wholesale Trade Sector along with merchant 
wholesalers, distributors, drop shippers, brokers, and agents. For 
purposes of Federal contracting, a wholesale trade firm that provides 
supplies to the Federal Government that it did not manufacturer is 
small if it, including its affiliates, has not more than 500 employees. 
The SBA proposed to retain the 500 employee size standard applicable to 
value added resellers and other wholesale trade nonmanufacturers for 
the proposed industry category of ITVARs.
    In response to a large number of comments objecting to the 500 
employee size standard for ITVAR, the SBA reassessed its decision to 
retain the nonmanufacturer size standard for this new industry 
category. As described below, the SBA has decided to establish a size 
standard of 150 employees for ITVARs. This decision is based on a 
review of the comments received to the proposed rule and an analysis of 
the characteristics of firms in the computer services and wholesale 
trade industries that are engaged in providing services along with 
information technology (IT) equipment. Below is a discussion of the 
comments received on the proposed rule and the size standard analysis.

Discussion of Comments

    The SBA received 291 timely comments on the proposed rule. Two 
hundred and seventy six comments

[[Page 74834]]

(94.8%) opposed the 500 employee size standard for ITVAR. Twelve 
comments (4.1%) supported the proposed size standard. The remaining 
three comments either supported a higher size standard or addressed 
other issues related to the proposed rule.

Comments Opposing the Proposal

    More than three-fourths of the 276 comments that strongly objected 
to the proposed ITVAR size standard submitted an identical or very 
similar comment. These comments stated that the average size of an 
ITVAR is 15 employees and 88% have 100 or fewer employees, based on 
data from the SBA and from a survey conducted by Computer News Reseller 
titled ``State of the Market 2002 Research.'' Based on these facts, the 
comments contended that a 500 employee size standard is inconsistent 
with the Small Business Act and the foundation of the SBA. These 
comments further recommended that SBA also adopt a 100 employee size 
standard for nonmanufacturers under the industry of Computer and 
Computer Peripheral Equipment and Software Merchant Wholesalers, NAICS 
423430 (formally NAICS 421430).
    The other comments opposing the proposed ITVAR size standard cited 
similar data on ITVARs to argue that businesses with up to 500 
employees are not small businesses in this industry and provided 
additional reasons for their position. Many of these comments argued 
that smaller IT businesses are not competitive against businesses with 
several hundred employees. Although smaller ITVARs may be competitive 
in terms of quality and service, the low margins in the industry make 
them uncompetitive with larger resellers. Under the proposed size 
standard, they argued that Federal agencies would tend to award 
contracts to the larger small businesses at the expense of much smaller 
businesses. Several comments considered a 500 employee ITVAR to be 
dominant in this field, and therefore, does not meet the Small Business 
Act's statutory definition of a small business which excludes dominant 
businesses as small (see 15 U.S.C. 632(a)(1)). Several comments also 
criticized the 500 employee size standard as merely an attempt to help 
Federal agencies to achieve their small business goals.

Comments Supporting the Proposal

    The 12 comments supporting the proposed ITVAR size standard gave 
several reasons for their position. Many of these comments noted that 
many firms outgrow the $21 million receipts-based IT industry size 
standards because a sizable proportion of receipts on Federal contracts 
are for the purchase of hardware and software from manufacturers rather 
than strictly for services performed by ITVAR firms. Related to this 
point, one comment stated that the proposed ITVAR size standard allows 
larger small businesses to continue to operate in an industry category 
after they outgrow other IT industry size standards. Another comment 
supported the proposed size standard by comparing the activities of 
value added resellers with small businesses that function as an order 
processing or clearing house for the resale of computer and related 
products. The comment contended that small businesses that provide 
staff involved in engineering, re-configuration, systems integration, 
and turnkey operations must have a large number of employees to perform 
these functions and to grow to compete with large businesses. One of 
the supporting comments also recommended adding a receipts-size 
standard of $50 million with the proposed 500 employee size standard to 
prevent large businesses from qualifying as small.

Comments on establishing an ITVAR Industry Category

    The SBA received seven comments on the issue of establishing an 
industry category for ITVAR. All seven commented in support of the new 
category. Three of these were from comments that opposed the 500 
employee size standard. One comment recommended changing the proposed 
service percentage range of 15% to 50% of contract value in the ITVAR 
definition to a range of 0% to 100% since contracts exclusively for 
hardware also include an implicit services component that contractors 
will provide to their customers.

The SBA's Response to Comments

    The SBA agrees that 500 employees is not an appropriate size 
standard for ITVARs. As the comments pointed out, a large number of 
firms engaged in this activity are much smaller than 500 employees. A 
business can enter into the ITVAR industry at a relatively small size 
and grow into a highly competitive business well before it reaches 500 
employees. The reasons given for comments in support of the proposed 
size standard support focused on being eligible as small businesses for 
large-sized contracts after firms have grown beyond the $21 million 
computer services size standard.
    While the SBA agrees that a size standard lower than 500 employees 
should be adopted, it does not agree that 100 employees is the 
appropriate size standard. The reasons provided by those comments 
focused on the average employee size of ITVARs and the percent of 
ITVARs with 100 or fewer employees. As described more fully below, the 
SBA considers several industry characteristics to assess a size 
standard for an industry. Average firm size is one industry factor, 
which is compared to the average size firm in other industries. The 
percent of industry firms at various sizes is not used. This factor is 
not as useful as other industry characteristics in assessing a size 
standard. The statistic is overwhelmingly driven by the concentration 
of firms with only a few employees. These firms have much turnover and 
account for an insignificant proportion of industry employment and 
receipts. For example, ITVARs with less than five employees comprise 
71% of industry firms but account for between 6% to 7% of industry 
employment and sales. A more useful measure to assess the economic 
significance of firms of varying sizes in an industry is the 
distribution of industry receipts by firm size. Data on this 
characteristic is discussed in the size standard analysis below.
    Based on a review of ITVAR industry characteristics, the SBA is 
adopting a 150 employee size standard, which it believes more 
sufficiently considers the overall characteristics of the types of 
firms engage in ITVAR activities. In addition, 150 employees is 
equivalent to the average number of employees of firms under the $21 
million size standard for computer services (NAICS 5415 industry 
group). Since firms in these industries also act as ITVARs, the SBA 
believes that it is beneficial to firms in these industries to have a 
consistent size standard, even though the size standard measures 
differ. As discussed as options in the proposed rule, the SBA 
considered proposing the $21 million receipts size standard and an 
employee equivalent of 150 employees. An employee size standard is 
considered a better measure of the size of ITVARs operation than 
receipts since a substantial proportion of their receipts merely 
reflect the dollar value of equipment and software sold.
    The SBA does not agree with the comment recommending changing the 
percentage of services that must be present in an ITVAR contract range 
from 0% to 100%. It is unlikely that a contract for computer equipment 
would later include a significant amount of services. As explained in 
the proposed rule, the purpose of the ITVAR industry category is to 
treat computer contracts with a meaningful amount of computer services, 
but where the majority of

[[Page 74835]]

contract dollars consists as equipment, in the same manner as other 
computer services contracts. Removing the requirement for a specific 
percentage of services defeats the purpose of the rule and would 
unintentionally change the size standards applicable to 
nonmanufacturers of computer equipment and for computer services.
    Size Standards Methodology: Congress granted the SBA discretion to 
establish detailed size standards (15 U.S.C. 632(a)(2)). The SBA's 
Standard Operating Procedure (SOP) 90 01 3, ``Size Determination 
Program'' (available on SBA's Web site at http:/www.sba.gov/library/soproom.html) sets out four categories for establishing and evaluating 
size standards: (1) The structure of the industry and its various 
economic characteristics; (2) the SBA program objectives and the impact 
of different size standards on these programs; (3) whether a size 
standard successfully excludes those businesses which are dominant in 
the industry; and (4) other factors if applicable. Other factors, 
including the impact on other agencies' programs, may come to the 
attention of the SBA during the public comment period or from the SBA's 
own research on the industry. No formula or weighting has been adopted 
so that the factors may be evaluated in the context of a specific 
industry. Below is a discussion of the SBA's analysis of the economic 
characteristics of an industry, the impact of a size standard on SBA 
programs, and the evaluation of whether a firm at or below a size 
standard could be considered dominant in the industry under review.
    Industry Analysis: Section 3(a)(3) of the Small Business Act (15 
U.S.C. 632 (a)(3)), requires that size standards vary by industry to 
the extent necessary to reflect differing industry characteristics. SBA 
has two ``base'' or ``anchor'' size standards that apply to most 
industries--500 employees for manufacturing industries and $6 million 
in average annual receipts 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 average annual receipts size 
standard for the nonmanufacturing industries. The receipts-based anchor 
size standard for the nonmanufacturing industries was adjusted 
periodically for inflation so that, currently, the anchor size standard 
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 the ``typical 
industry.''
    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 
characteristics of the comparison group, a size standard higher or, in 
rare cases, lower than the anchor size standard may be considered 
appropriate. The larger the differences between the specific industry's 
characteristics and the comparison group's characteristics, the larger 
the difference between the appropriate industry size standard and the 
anchor size standard. SBA will consider adopting a size standard below 
the anchor size standard only when (1) all or most of the industry 
characteristics are significantly smaller than the average 
characteristics of the comparison group, or (2) other industry 
considerations strongly suggest that the anchor size standard would be 
an unreasonably high size standard for the industry under review.
    The primary evaluation factors that the SBA considers in analyzing 
the structural characteristics of an industry are listed in 13 CFR 
121.102 (a) and (b). Those factors include average firm size, 
distribution of firms by size, start-up costs, and industry 
competition. The analysis also examines 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 for a particular industry. 
Public comments submitted on proposed size standards are also an 
important source of additional information that the 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. ``Distribution of firms by size'' is the proportion of industry 
receipts, employment, or other economic 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 
adopting the anchor size standard. A size standard higher than the 
anchor size standard is supported 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, SBA is comparing 
the size of firms within an industry to the size of firms in the 
comparison group at which predetermined percentages of receipts are 
generated by firms smaller than a particular size firm. For example, 
assume for the industry under review that 50% of total industry 
receipts are cumulatively generated by firms of 200 employees and less. 
This contrasts with the comparison group (composed of industries with 
the nonmanufacturing anchor size standard of $6 million) in which firms 
of 64 employees and less cumulatively generated 50% of total industry 
receipts. Viewed in isolation, the higher figure for the industry under 
review suggests that a size standard higher than the nonmanufacturing 
anchor size standard may be warranted. Other size distribution 
comparisons in the industry analysis include 40%, 60%, and 70%, as well 
as the 50% 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 one 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, the SBA uses a proxy measure to assess 
the financial burden for entry-level firms. For this analysis, the SBA 
has calculated nonpayroll costs per establishment for each industry. 
This is derived by first calculating the percentage of receipts in an 
industry that is either retained or expended on costs other than 
payroll costs. (The

[[Page 74836]]

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 
average establishment receipts to arrive at nonpayroll costs per 
establishment (an establishment is a business entity operating at a 
single location). An industry with a significantly higher level of 
nonpayroll costs per establishment than that of the comparison group is 
likely to have higher start-up costs, which would tend to support a 
size standard higher than the anchor size standard. Conversely, if the 
industry showed significantly lower nonpayroll costs per establishment 
when compared to the comparison group, 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 final rule, the SBA compares 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 for industries 
in the comparison groups. If a significant proportion of economic 
activity within the industry is concentrated among a few relatively 
large producers, the SBA tends to set a size standard relatively higher 
than the anchor size standard in order to assist firms in a broader 
size range to compete with firms that are larger and more dominant in 
the industry. In general, however, the SBA does not consider this to be 
an important factor in assessing a size standard if the four-firm 
concentration ratio falls below 40% for an industry under review.
    5. ``Impact of a size standard revision on the SBA programs'' 
refers to the possible impact a size standard change may have on the 
level of small business 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 contracting revenues, the greater is 
the justification for a size standard higher than the existing one.
    Another factor to evaluate the impact of a proposed size standard 
on the SBA's programs is the volume of guaranteed loans within an 
industry and the size of firms obtaining those loans. This factor is 
sometimes examined to assess whether the current size standard may be 
restricting the level of financial assistance to firms in that 
industry. If small businesses receive significant amounts of 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 necessary.
    Evaluation of Industry Size Standard: The SBA reviewed data on 
firms in two industry categories to evaluate a size standard for 
ITVARs. Most ITVARs operate either in the Computer Systems Design and 
Related Services industry group (NAICS 5415) or in the Computer and 
Computer Peripheral Equipment and Software Merchant Wholesalers 
industry (NAICS 423430, formally code 421430). Instead of equally 
combining the data from these two industries, the SBA adjusted the data 
by the proportion of sales of firms that provide both services and 
equipment. Data from the U.S. Bureau of the Census show that firms in 
the Computer Systems Design and Related Services industry that provide 
both services and equipment generate 23% of total industry receipts 
(see Sources of Receipts or Revenue, 1997 Economic Census, 
Professional, Scientific, and Technical Services, Subject Series, 
EC975545-LS, U.S. Bureau of the Census, August 2000). In the Computer 
and Computer Peripheral Equipment and Software Merchant Wholesalers 
industry, firms providing both equipment and services (service 
contracts, installing computers, and sales of integrated systems) 
generate 14% of total industry sales from these and all other 
activities (see Commodity Line Sales, 1997 Economic Census Wholesale 
Trade, Subject Series, EC97W425-LS, U.S. Bureau of the Census, August 
2000). The results of combining the two industries are evaluated using 
the SBA's size standards methodology described above.
    The SBA is aware of ITVAR data from private sector sources. The SBA 
considered these data but decided not to use them for three reasons. 
First, it is unclear whether the private sector data collected include 
the receipts and employees of affiliates. Second, whether the data 
separately show the receipts and employees of all industry activities 
and from just ITVAR activities. These are key conceptual features of 
the Census Bureau data that the SBA relies upon to evaluate size 
standard. Without taking those factors into consideration, misleading 
data on firm size may be relied upon. Third, private sector data 
usually consist of a limited sample that tends to miss smaller sized 
firms. Given these uncertainties, the SBA decided to assess the Census 
Bureau data.
    Tables 1 and 2 below show the structural characteristics for the 
derived ITVAR industry and for two size standards comparison groups. 
The first comparison group is comprised of all industries with a $6 
million receipts-based size standard, referred to as the 
``nonmanufacturing anchor group.'' A firm with $6 million in receipt 
size in these industries has, on average, 65 employees. SBA assumes 
that this size standard is appropriate for a nonmanufacturing industry. 
This is the most logical set of industries to group to assess whether 
the anchor size standard is appropriate. The second comparison group 
consists of the nonmanufacturing industries with the highest receipt-
based size standards established by the SBA. The SBA refers to this 
comparison group as the ``nonmanufacturing higher-level size standard 
group.'' This group's size standards range from $21 million to $30 
million. Firms within this size range average in size between 165 
employees to 230 employees. If an industry's characteristics are 
significantly larger than those of the nonmanufacturing anchor group, 
the SBA will compare them to the characteristics of the higher-level 
size standards group. By doing so, the SBA can assess whether a size 
standard should be among the highest size standards or somewhere 
between the anchor size standard and the highest size standards.
    Industry Structure Considerations: Table 1 lists three evaluation 
factors for the ITVAR industry and the two size standards comparison 
groups. These include two measures of average firm size and start-up 
costs (as measured by nonpayroll receipts per establishment), and the 
four-firm concentration ratio.

[[Page 74837]]



  Table 1.--Industry Characteristics of the ITVARs Industry, the Nonmanufacturing Anchor Group and Higher-Level
                                               Size Standard Group
----------------------------------------------------------------------------------------------------------------
                                                   Average firm size          Start-up Costs
                                               ---------------------------------------------------   Four-firm
                                                                         Non-payroll               concentration
                   Category                      Receipts                receipts per   Employee       ratio
                                                (millions)   Employees  establishment  equivalent   (percentage)
                                                                          (millions)
----------------------------------------------------------------------------------------------------------------
IT value added reseller.......................       $3.47          14         $2.42           10          18.3
Nonmanufacturing anchor group.................        0.95          11          0.56            6          14.4
Higher-level size standard group..............        4.60          21          1.80           14          26.7
----------------------------------------------------------------------------------------------------------------

    The average employment size of an ITVAR of 14 employees is about 
the same as for the nonmanufacturer anchor group level of 11 employees. 
In terms of average receipts size, ITVARs average receipts size are 
more than triple that of the nonmanufacturer anchor group's average 
receipts size. This difference reflects the larger proportion of 
equipment sales by ITVARs than by firms in other nonmanufacturing 
industries. Since the size standard under consideration is based on 
number of employees, the evaluation of this factor will not be based on 
average receipts size, but is shown for information. The average firm 
size of ITVARs is two-thirds of the higher size standards group's 
average employment firm size of 21 employees. Based on the ratio 
between the ITVAR's and the two comparison groups' average firm size, a 
size standard at or slightly above the nonmanufacturer level is 
supportable, or between 65 to 100 employees.
    The nonpayroll receipts per establishment indicator is a 
measurement of entry barriers. Based on this measure, start-up costs 
for ITVARs are almost five times larger than those of the 
nonmanufacturer group and about one-third of the higher-level size 
standard group. As with the average firm size factor, the receipts 
levels are misleading when considering an employee size standard. To 
make this measure more useful, the receipts levels were adjusted by the 
sales per employee for each industry category to show what number of 
employees it would take, on average, to earn those levels of receipts. 
This conversion shows that ITVARs with 10 employees generate the 
estimated average nonpayroll receipts per establishment. This level 
falls in the middle between the employment sizes calculated for the 
nonmanufacturer anchor and higher size standards comparison groups, 6 
and 14, employees, respectively. This industry characteristic supports 
a size standard between the nonmanufacturer anchor and higher size 
standard group levels, or between 100 to 125 employees.
    The ITVAR industry's four-firm concentration ratio is estimated to 
be 18.3%. This is derived from a weighted average of the four-firm 
concentration ratios of 23% for the Computer and Computer Peripheral 
Equipment and Software Merchant Wholesalers industry (NAICS 423430, 
formally code 4421430) and 15.5% for the Computer Systems Design and 
Related Services industry group (NAICS 5415). A ratio of 18.3% 
indicates that a small number of businesses do not dominate this 
industry. As discussed earlier in the description of the size standards 
methodology, this is not an important factor in assessing a size 
standard when the four-firm concentration ratio is below 40%.
    Table 2 below shows data on the distribution of receipts by firm 
employment size. For this factor, the SBA is evaluating the cumulative 
size of firm that accounts for predetermined percentages of total 
industry receipts (40%, 50%, 60%, and 70%). The table shows firms up to 
a specific employment size, along with all other smaller firms, account 
for a specific percentage of total industry receipts.

 Table 2.--Percent of Receipts by Firm Size of the ITVARs Industry, the
 Nonmanufacturing Anchor Group, and the Higher-level Size Standard Group
                          [Number of employees]
------------------------------------------------------------------------
                                      Size of  Size of  Size of  Size of
              Category                firm at  firm at  firm at  firm at
                                        40%      50%      60%      70%
------------------------------------------------------------------------
IT Value Added Reseller.............      250    1,000  >2,500   >2,500
Nonmanufacturing Anchor Group.......       35       64     130      307
Higher-level Size Standard Group....      188      391    1,051  >2,500 
                                                                  ------------------------------------------------------------------------

    The ITVAR industry consists of firms many times larger than firms 
in the nonmanufacturing anchor group. ITVARs with 250 employees and 
less obtained 40% of the industry's total receipts whereas firms of 35 
employees and less in the nonmanufacturing anchor group obtained 40% of 
the industry's total receipts. For the other size distribution 
percentages, ITVARs more than 15 times the size of the firms in the 
nonmanufacturing anchor group. These data support an ITVAR size 
standard significantly above the anchor nonmanufacturing level of 65 
employees.
    Relative to the higher-level size standards group, ITVARs that 
obtained 40% of industry sales were approximately one-third larger than 
the size of firms that cumulatively obtained 40% of industry receipts 
in the higher-level size standard group (250 employees and 188 
employees, respectively). The size of ITVARs is more than twice the 
size of firms for the higher-level size standard group at the 50% and 
60% levels. At the 70% level, firms of at least 2,500 employees and 
less cumulatively captured that proportion of industries sales for the 
ITVAR industry and the higher-level size standard group. The analysis 
of

[[Page 74838]]

these distributions of receipts support a size standard no less than 
the highest employee-equivalent size standard of the higher-size 
standards group and up to about twice that level, or between 230 to 400 
employees.
    SBA Program Considerations: As part of the review of a size 
standard, the SBA reviews how a change might impact its programs. Most 
of the impact of a change to the ITVAR size standard will occur in 
Federal contracting. Data are not collected on Federal contracts 
designated as ITVAR contracts. These types of contracts are reported in 
several industry categories. For purposes of the ITVAR size standard 
analysis, the SBA sorted data by NAICS codes and the Federal 
Procurement Data Center's (FPDC) Product and Service (PCS) codes to 
assess small business participation in Federal contracting. Under the 
existing size standards, an ITVAR contract is classified under a NAICS 
manufacturing code since the majority of the dollar value of an ITVAR 
contract (as defined in the proposed rule) is for computer equipment. 
Some of these contracts, however, are also classified under a wholesale 
trade code, albeit improperly. The SBA examined contracts awarded 
during fiscal years 2001-02 in three NAICS industries--Electronic 
Computer Manufacturing (NAICS 334111), Other Computer Peripheral 
Equipment Manufacturing (NAICS 334119), and Computer and Computer 
Peripheral Equipment and Software (NAICS 421430). From these contracts, 
ITVAR contracts were identified as those that the contracting agency 
had also designated the services PSC of ``Automatic Data Processing and 
Telecommunication Services'' (PSC codes D301 through D399). The 
resulting list of contracts therefore consisted primarily of computer 
equipment but also require related services to be performed by the 
contractor.
    The SBA recognizes that this set of Federal contracting data only 
approximates Federal ITVAR contracting. However, the types of contracts 
identified capture the types of activities described by the ITVAR size 
standard description. Also, the large volume of contracting identified 
by the SBA's approach ($925.7 million) is highly likely to capture 
significant trends in small business participation. For these two 
considerations, the SBA believes that data are sufficient to assist in 
evaluating an ITVAR size standard.
    Table 3 shows the amount of estimated ITVAR Federal contracting for 
fiscal years 2001-02.

       Table 3.--Federal Contracts for Information Technology Value Added Resellers, Fiscal Years 2001-02
----------------------------------------------------------------------------------------------------------------
                                               Actions                                 Dollars
                                --------------------------------------------------------------------------------
          Fiscal year                           Small                                     Small
                                    Total     business     Percent        Total         business       Percent
----------------------------------------------------------------------------------------------------------------
2001...........................       1,514         714        47.2    $405,048,000    $143,432,000         35.4
2002...........................       1,790         937        52.3    $520,676,000    $137,987,000         26.5
2001-02........................       3,304       1,651        50.0    $925,724,000    $281,419,000         30.4
----------------------------------------------------------------------------------------------------------------
Source: SBA estimates from the Federal Procurement Data System, U.S. General Services Administration.

    These data show small businesses obtaining half of ITVAR contact 
actions. These small business awards represent about 30% of the total 
dollar of contract awards. Compared to the share of total industry 
receipts, small ITVARs obtained 45.5% of total industry sales. This 
discrepancy between the small business shares suggests that small 
businesses as a group are less competitive in the Federal ITVAR market 
than in the private sector. The overall level of small ITVAR 
participation in Federal contracting does not support the need to lower 
the current 500 employee size standard.
    The comments opposing the proposed 500 employee size standard, 
however, argued that many small businesses are not competitive against 
the larger small businesses that are hundreds of employees in size. The 
SBA examined this point in greater detail. The data show that larger 
small businesses, those between 200 to 500 employees, accounted for 
only one-fifth of the ITVAR contracts awarded to small businesses. 
Furthermore, most contracts identified as ITVAR contracts were full and 
open contracts. In terms of the dollar value of all Federal ITVAR 
contracts, the larger small businesses obtain 6.2% of contracts 
dollars, which is slightly below their estimated 8.7% share of total 
industry sales. Thus, it does not appear that a compelling argument 
exists that Federal ITVAR awards to small businesses are dominated by 
the larger small businesses.
    The SBA believes that much of the concern about larger small 
businesses dominating small business awards are associated with 
contracts exclusively for IT equipment. The SBA is examining in a 
similar manner those Federal contracts and will assess the implications 
of its findings on the nonmanufacturer size standard.
    The 7(a) Loan Guaranty Program is SBA's primary business loan 
program. Table 4 below summarizes the number and amount of 7(a) loans 
that SBA guaranteed to firms in the two industries comprising ITVARs 
over the past two fiscal years. The SBA does not identify firms below 
an industry level to more specifically identify ITVARs.

           Table 4.--7(a) Loans in NAICS 421430 and NAICS 5415
------------------------------------------------------------------------
                                      FY 2001              FY 2002
------------------------------------------------------------------------
                                No.      Amount      No.      Amount
------------------------------------------------------------------------
7(a) Loans....................  227     $41,802,575  921    $139,293,461
                               -----------------------------------------
Average Loan Size.............         184,152
                                      151,242
------------------------------------------------------------------------
 Source: SBA internal data base.


[[Page 74839]]

    Small business eligibility for an SBA 7(a) guaranteed loan is based 
on the size standard of the primary industry of the applicant. For 
ITVARs that are primarily engaged in the Wholesale Trade Sector, the 
applicable size standard is 100 employees. For ITVARs primarily engaged 
in computer services, $21 million in average annual receipts is the 
applicable size standards. Computer services firms near the $21 million 
size standard average in size between 125 to 150 employees.
    A review of the distribution of 7(a) loans by employment size of 
the firm shows that only 10 loans, amounting to $6.6 million, were made 
in fiscal years 2001-02 to firms of 100 or more employees. Moreover, 
all of these loans were to firms in the computer services industries, 
with only one loan to a computer wholesale trade firm of more than 50 
employees. These loans represent only 1% of the number of loans and 
less than 4% of the dollar value of loans in the two ITVAR industries. 
This experience indicates the current size standards are not hindering 
access to this program for small ITVARs. Thus, no need exists to change 
the current size standards to broaden access to capital for small 
ITVARs.
    Overview: Based on the above analysis, SBA is adopting a 150 
employee size standard. All of the industry factors support a size 
standard lower than the current 500 employee size standard. The factor 
of distribution of receipts suggests a size standard in the range of 
230 to 400 employees since the industry consists of larger-sized 
businesses that obtain more than half of industry receipts. The 
industry factors of average size firm and nonpayroll receipts per 
establishment support a size standard between 65 to 125 employees. The 
four-firm concentration ratio is a neutral factor. The assessment of 
program considerations does not indicate a size standard change from 
the current 500 employee size standard for Federal contracting or the 
100 employee size standard for ITVAR in Wholesale Trade. In light of 
the comments strongly supporting a 100 employee size standard, the SBA 
believes the evaluation of the industry characteristics should give 
greater consideration to the smaller range of size standard levels 
supported by the data, or between the 65 to 230 employee levels. The 
SBA believes a 150 employee size standard is an appropriate balance 
between the available information on the industry and the strong view 
of the comments for a size standard significantly below 500 employees. 
In addition, 150 employees would be equivalent to a $21 million 
employee size standard applicable to Federal computer services 
contracts. Since many ITVARs provide primarily computer services, 
having a size standard at a similar level results in these firms being 
small for both computer service contracts and ITVAR contracts. The SBA 
believes this administrative consideration is both practical and 
desirable. It results in a common size standard for closely related 
activities and avoids complicating the size standards with a 
significantly different size standard level applicable to small 
businesses that operate in the two industry activities.
    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. When the SBA evaluates a size standard, it considers 
whether a business concern at or below a size standard could be 
dominant in its field of operation.
    For this assessment the SBA generally considers the market share of 
firms at the contemplated 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. 
The SBA has determined that no firm at or below a 150 employee size 
standard would dominate the ITVAR industry on a national basis. The 
average size firm meeting the size standard of 150 employees generates 
approximately 0.1% of total industry receipts. This level of market 
share effectively precludes any firm at or below the proposed size 
standard from controlling this industry.

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

    The Office of Management and Budget (OMB) has determined that the 
final 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 purposes of 
Executive Order 12988, the SBA has determined that this rule is 
drafted, to the extent practicable, in accordance with the standards 
set forth in that order. For purposes of Executive Order 13132, the SBA 
has determined that this rule does not have any federalism implications 
warranting the preparation of a Federalism Assessment. For the purpose 
of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, the SBA has 
determined that this rule would not impose new reporting or record 
keeping requirements. Below is a regulatory impact a of this size 
standard change.

Regulatory Impact Analysis

1. Is there a need for the regulatory action?

    The 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, the SBA must establish distinct definitions of which 
businesses are deemed small. 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. Establishing an 
industry category and size standard for ITVARs more realistically 
applies small business eligibility requirements under Federal contracts 
that combine substantial services with the acquisition of computer 
hardware and software.

2. 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. These include SBA's financial assistance 
programs and Federal procurement preference programs for small 
businesses, 8(a) firms, small disadvantaged businesses (SDB), and small 
businesses located in Historically Underutilized Business Zones 
(HUBZone). Through the assistance of these programs, small businesses 
may benefit by becoming more knowledgeable, stable, and competitive 
businesses.
    The benefits of a new industry category and size standard would 
accrue to two groups. First, small businesses competing for ITVAR 
Federal procurements that contain requirements more similar to industry 
practices. Second, Federal agencies that will be able to more easily 
classify IT contracts that combine equipment purchases and services.
    Newly defined small businesses would benefit from the SBA's 
financial programs, in particular its 7(a) Guaranteed Loan Program. 
Currently, an ITVAR primarily engaged in wholesale trade qualifies for 
these loans if they

[[Page 74840]]

have 100 or fewer employees. This final rule would expand eligibility 
to about 60 additional firms. Since over the last two years only one 
loan was guaranteed to a computer wholesaler with more than 50 
employees, it is unlikely that this rule would expand the use of the 
7(a) Program.
    Newly defined small businesses would also benefit from the SBA's 
economic injury disaster loan program. Since this program is contingent 
upon the occurrence and severity of a disaster, no meaningful estimate 
of benefits can be projected.
    The SBA estimates that 192 currently defined small businesses 
(those firms that qualify as a nonmanufacturer under a 500 employee 
size standard) would lose small business status and not be eligible 
businesses for Federal small business procurement preference programs. 
The benefits of the rule in Federal contracting will be in terms of 
clarifying requirements on Federal contracts combining IT supplies and 
services and increasing Federal procurement opportunities for small 
businesses that are much smaller than 500 employees. It is uncertain 
how much additional contracting may go to the small businesses with 150 
or fewer employees. The SBA expects many of the Federal contracts 
obtained by ITVARs between 151 to 500 employees would be awarded to the 
smaller small businesses. This is estimated to be between $10 million 
to $25 million annually.
    This rule is not expected to increase administrative costs to the 
Federal Government associated with bidders for Federal small business 
procurement programs, additional firms seeking SBA guaranteed lending 
programs, and firms eligible for enrollment in SBA's PRO-Net data base 
program. For the limited number of businesses affected by this rule, it 
is unlikely to materially change the costs associated with compliance 
and verification of small business status and protests of small 
business status, since 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. With a more appropriate contract 
requirement for IT value added service, Federal agencies may choose to 
set aside more contracts for competition among small businesses rather 
than using full and open competition. The movement from unrestricted to 
set aside is likely to result in competition among fewer bidders for a 
contract. The additional costs associated with fewer bidders, however, 
are likely to be minor since, as a matter of policy, procurements may 
be set aside for small businesses or under the 8(a) and HUBZone 
Programs only if awards are expected to be made at fair and reasonable 
prices.
    The final size standard may have distributional effects among 
currently defined small businesses and the newly defined small 
businesses. Although the actual outcome of the gains and losses among 
these small businesses cannot be estimated with certainty, it is likely 
that a transfer of some Federal contracts from small businesses above 
150 employees to those under 150 employees. An analysis of Federal 
ITVAR contracts for fiscal years 2001-02 showed about $57 million was 
awarded to small ITVARs of about 200 employees to 500 employees. Of 
these contracts, $23 million was awarded under the 8(a) Program to 
firms within that size range. If contracting officers continued with 
about the same level of 8(a) contracting and decided to set-aside 
additional ITVAR contracts, $10 million to $25 million annually could 
be shifted from small ITVARs above 150 employees to those with less 
than 150 employees.
    The creation of an ITVAR industry category and size standard is 
consistent with SBA's statutory mandate to assist small businesses. 
This regulatory action promotes the Administration's objectives. One of 
the SBA's goals in support of the Administrator'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 the SBA's size standards for their programs to 
eliminate the need to establish an administrative mechanism for 
developing their own size standards.

Final Regulatory Flexibility Analysis

    Under the Regulatory Flexibility Act (RFA), this rule may have a 
significant impact on a substantial number of small entities. 
Immediately below, the SBA sets forth a final regulatory flexibility 
analysis (FRFA) of this proposed rule addressing the reasons and 
objectives of the rule; the SBA's description and estimate of the 
number of small entities to which the rule will apply; the projected 
reporting, record keeping, and other compliance requirements of the 
rule; the relevant Federal rules which may duplicate overlap or 
conflict with the final rule; and alternatives considered by the SBA.

(1) What is reason for this action?

    As discussed in the supplemental information, the purpose of this 
final rule is to establish more reasonable and eligibility requirements 
and size standard for Federal IT contracts that combine the acquisition 
of computer equipment and services. The adopted changes will better 
assist small ITVARs in obtaining Federal contracts.

(2) What is the objective and legal basis for the rule?

    Section 3(a) of the Small Business Act (15 U.S.C. 632(a)) gives SBA 
the authority to establish and change size standards. Size standards 
are developed on an industry basis and vary by industry to reflect 
differing characteristics of firms in an industry or other appropriate 
factors regarding an industry. This rule establishes an industry 
category of ITVAR that SBA believes is necessary to appropriately apply 
its small business assistance program to small businesses in this 
category.

(3) What is SBA's description and estimate of the number of small 
entities to which the rule will apply?

    SBA estimates that approximately 1,737 small businesses could 
receive assistance as a result of this proposed rule. In SBA's PRO-Net 
data base, 1,760 businesses indicated that they are wholesalers of IT 
equipment and are capable of providing some other services. All but 23 
of these firms have 150 or fewer employees. It cannot be determined how 
many could actually meet the requirements of the ITVAR definition. 
Thus, the actual number of affected businesses is likely to be smaller. 
A few small computer manufacturers could be adversely affected by this 
rule since small business set-aside, 8(a), or HUBZone contracts 
classified under the ITVAR industry would not apply the nonmanufacturer 
rule. However, the SBA believes the impact would be minimal since the 
ITVAR contracts are most likely not currently being awarded to small 
manufacturers under these programs.
    Description of Potential Benefits of the Rule: The most significant 
benefit to businesses obtaining small business status as a result of 
this rule is their eligibility for Federal small business assistance 
programs. These include SBA's financial assistance programs and Federal 
procurement preference

[[Page 74841]]

programs for small businesses, 8(a) firms, SDBs, and small businesses 
located in HUBZones.
    In fiscal years 2001-02, $925.7 million were awarded in contracts 
that were primarily for IT equipment but also included services. Small 
businesses received $281.4 million. The SBA estimates that 
approximately $10 million to $25 million in additional Federal 
contracts could be awarded annually to smaller small businesses under 
the ITVAR 150 employee size standard. Most of these contracts would 
consist of a potential transfer from ITVARs with between 150 and 500 
employees to small ITVARs with fewer than 150 employees. This does not 
represent the creation of new contracting activity by the Federal 
government, merely a possible reallocation or transfer to different 
sized firms.
    The SBA does not believe any additional loans would be made under 
its 7(a) Guaranteed Loan Program as a result of changes the SBA is 
proposing in this rulemaking. ITVARs primarily engaged in wholesale 
trade are currently eligible for this program if they have 100 or fewer 
employees. In the last two years, only one 7(a) loan was made to 
wholesale trade firm with more than 50 employees.
    Description of Potential Costs of the Rule: The changes in size 
standards as they affect Federal contracting are not expected to add 
any significant costs to the Federal Government. As a matter of policy, 
procurements may be set aside for small businesses or under the 8(a) 
and HUBZone Programs only if awards are expected to be made at 
reasonable prices. Although fewer small businesses will be competing 
for ITVAR contracts, the large number of small businesses should have 
little discernable impact on competition. Similarly, this rule should 
not result in any added costs associated with the 7(a) Program. The 
amount of lending authority SBA can make or guarantee is established by 
appropriation.
    The competitive effects of size standard revisions differ from 
those normally associated with other regulations which typically burden 
smaller firms to a greater degree than larger firms in areas such as 
prices, costs, profits, growth, innovation and mergers. A change to a 
size standard is not anticipated to have any appreciable effect on any 
of these factors, although small businesses, 8(a) firms, or SDBs 
between 150 to 500 employees may be less successful in competing for 
some Federal procurement opportunities. On the other hand, with more 
realistic eligibility requirements, Federal agencies may increase the 
overall number of contracting opportunities available under these 
programs, and this could result in greater opportunities for businesses 
much smaller than the current size standard.

(4) Will this rule impose any additional reporting or record keeping 
requirements on small businesses?

    This final rule does not impose any new information collection 
requirements which require OMB approval under the Paperwork Reduction 
Act of 1980, 44 U.S.C. 3501-3520. A new size standard does not impose 
any additional reporting, record keeping or compliance requirements on 
small entities. Changing size standards alters the access to SBA 
programs that assist small businesses, but does not impose a regulatory 
burden as they neither regulate nor control business behavior.

(5) What are the relevant Federal rules which may duplicate, overlap or 
conflict with the final rule?

    This final rule overlaps rules of other Federal agencies that use 
the SBA's size standards to define a small business. Under section 
3(a)(2)(c) of the Small Business Act, unless specifically authorized by 
statute, Federal agencies must use SBA's size standards to define a 
small business. In 1995, the SBA published in the Federal Register a 
list of statutory and regulatory size standards that identified the 
application of the SBA's size standards as well as other size standards 
used by Federal agencies (60 FR 57988-57991, dated November 24, 1995). 
The SBA is not aware of any Federal rule that would duplicate or 
conflict with establishing size standards.

(6) What alternatives did the SBA consider?

    The SBA cannot estimate the impact of a size standard change on 
each and every Federal program that uses its size standards. In cases 
where an SBA size standard is not appropriate, the Small Business Act 
and the SBA's regulations allow Federal agencies to develop different 
size standards with the approval of the SBA Administrator (Sec.  
121.902). For purposes of a regulatory flexibility analysis, agencies 
must consult with the SBA's Office of Advocacy when developing 
different size standards for their programs.
    SBA considered revising its definition of a manufacturer. On April 
1, 1999, the SBA published in the Federal Register a ``Request for 
Comments'' asking for comments on a modern definition of the term 
manufacturer and a new definition for ``Remanufacturer'' (64 FR 15708, 
dated April 1, 1999). The SBA received only six comments on this issue, 
none of which provided sufficient information to support a revision to 
the SBA's current manufacturer definition. After further review, the 
SBA now believes that establishing an ITVAR industry category is a more 
effective approach to addressing the size eligibility requirements of 
nonmanufacturers providing substantial services along with IT products 
on Federal contracts.
    As discussed in the proposed rule, the SBA considered three other 
size standards along with its proposed 500 employee size standard. One 
of those alternatives was the 100 employee size standard advocated by 
many of the comments. As explained in this final rule, the SBA believes 
that available industry data and Federal contracting trends support a 
size standard much lower than the proposed 500 employee size standard 
but higher than 100 employees.

List of Subjects in 13 CFR Part 121

    Administrative practice and procedure, Government procurement, 
Government property, Grant programs--business. Loan programs--business, 
Small businesses.

0
For the reasons set forth in the preamble, the SBA amends part 121 of 
title 13 of the Code of Federal Regulations as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

Subpart A--Size Eligibility Provisions and Standards

0
1. The authority citation of part 121 continues to read as follows:

    Authority: 15 U.S.C. 632(a), 634(b)(6), 636(b), 637(a), 644(c) 
and 662(5) and sec. 304, Pub. L. 103-403, 108 Stat. 4175, 4188, Pub. 
L. 106-24, 113 Stat. 39.
0
2. In Sec.  121.201, in the table ``Small Business Size Standards by 
NAICS Industry,'' under the heading Subsector 541--Professional, 
Scientific, and Technical Services, revise the entry for 541519 to read 
as follows:

[[Page 74842]]



             Small Business Size Standards by NAICS Industry
------------------------------------------------------------------------
                                          Size standards  Size standards
   NAICS codes      NAICS U.S. industry   in millions of   in number of
                           title              dollars        employees
------------------------------------------------------------------------
 
                              * * * * * * *
------------------------------------------------------------------------
     Subsector 541--Professional, Scientific and Technical Services
------------------------------------------------------------------------
 
                              * * * * * * *
------------------------------------------------------------------------
541519..........  Other Computer Related           $21.0  ..............
                   Services.
 
------------------------------------------------------------------------
EXCEPT..........  Information Technology  ..............         \18\150
                   Value Added Resellers
                   \18\.
------------------------------------------------------------------------

* * * * *

0
3. In Sec.  121.201, add footnote 18 at the end of the footnote 
section, under the table to read as follows:
Footnotes
* * * * *

    18. NAICS code 541519--An Information Technology Value Added 
Reseller provides a total solution to information technology 
acquisitions by providing multi-vendor hardware and software along 
with significant services. Significant value added services consist 
of, but are not limited to, configuration consulting and design, 
systems integration, installation of multi-vendor computer 
equipment, customization of hardware or software, training, product 
technical support, maintenance, and end user support. For purposes 
of Government procurement, an information technology procurement 
classified under this industry category must consist of at least 15% 
and not more than 50% of value added services as measured by the 
total price less the cost of information technology hardware, 
computer software, and profit. If the contract consists of less than 
15% of value added services, then it must be classified under a 
NAICS manufacturing industry. If the contract consists of more than 
50% of value added services, then it must be classified under the 
NAICS industry that best describes the predominate service of the 
procurement. To qualify as an Information Technology Value Added 
Reseller for purposes of SBA assistance, other than for Government 
procurement, a concern must be primarily engaged in providing 
information technology equipment and computer software and provide 
value added services which account for at least 15% of its receipts 
but not more than 50% of its receipts.

    Dated: September 24, 2003.
Hector V. Barreto,
Administrator
[FR Doc. 03-31795 Filed 12-24-03; 8:45 am]
BILLING CODE 8025-01-P