[Federal Register Volume 81, Number 16 (Tuesday, January 26, 2016)]
[Rules and Regulations]
[Pages 4436-4469]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-00922]



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Vol. 81

Tuesday,

No. 16

January 26, 2016

Part III





Small Business Administration





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13 CFR Part 121





Small Business Size Standards: Industries With Employee Based Size 
Standards Not Part of Manufacturing, Wholesale Trade, or Retail Trade; 
Small Business Size Standards for Manufacturing; Final Rules

  Federal Register / Vol. 81 , No. 16 / Tuesday, January 26, 2016 / 
Rules and Regulations  

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SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245-AG51


Small Business Size Standards: Industries With Employee Based 
Size Standards Not Part of Manufacturing, Wholesale Trade, or Retail 
Trade

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

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SUMMARY: The U.S. Small Business Administration (SBA) modifies 36 
employee based small business size standards for industries and sub-
industries (i.e., ``exceptions'' in SBA's table of size standards) that 
are not part of North American Industry Classification System (NAICS) 
Sector 31-33 (Manufacturing), Sector 42 (Wholesale Trade), or Sector 
44-45 (Retail Trade). Specifically, SBA increases 30 size standards for 
industries and three for sub-industries or ``exceptions.'' SBA also 
decreases size standards from 500 employees to 250 employees for three 
industries, namely NAICS 212113 (Anthracite Mining), NAICS 212222 
(Silver Ore Mining), and NAICS 212291 (Uranium-Radium-Vanadium Ore 
Mining). SBA maintains the Information Technology Value Added Resellers 
(ITVAR) sub-industry or ``exception'' under NAICS 541519 (Other 
Computer Related Services) with the 150-employee size standard, but 
amends Footnote 18 to SBA's table of size standards by adding the 
requirement that the supply (i.e., computer hardware and software) 
component of small business set-aside ITVAR contracts must comply with 
the nonmanufacturing performance requirements or nonmanufacturer rule 
(NMR). Additionally, SBA eliminates the Offshore Marine Air 
Transportation Services sub-industry or ``exception'' under NAICS 
481211 and 481212 and Offshore Marine Services sub-industry or 
``exception'' under NAICS Subsector 483 and their $30.5 million 
receipts based size standard. This change includes removing Footnote 15 
from the table of size standards. As part of its ongoing comprehensive 
size standards review, SBA evaluated employee based size standards for 
57 industries and five sub-industries that are not in NAICS Sectors 31-
33, 42, or 44-45 to determine whether they should be retained or 
revised.

DATES: This rule is effective on February 26, 2016.

FOR FURTHER INFORMATION CONTACT: Jorge Laboy-Bruno, Ph.D., Economist, 
Size Standards Division, (202) 205-6618 or [email protected].

SUPPLEMENTARY INFORMATION: 

Introduction

    To determine eligibility for Federal small business assistance, SBA 
establishes small business size definitions (referred to as ``size 
standards'') for private sector industries in the United States. SBA 
uses two primary measures of business size--average annual receipts and 
average number of employees. SBA uses financial assets and refining 
capacity to measure the size of a few specialized industries. In 
addition, SBA's Small Business Investment Company (SBIC), Certified 
Development Company (CDC/504), and 7(a) Loan Programs use either the 
industry based size standards or net worth and net income based 
alternative size standards to determine eligibility for those programs. 
At the start of the SBA's current comprehensive size standards review 
when the size standards were based on NAICS 2007, there were 41 
different size standards covering 1,141 NAICS industries and 18 sub-
industry activities (``exceptions'' in SBA's table of size standards). 
Thirty-one of these size levels were based on average annual receipts, 
seven were based on average number of employees, and three were based 
on other measures. Presently, under NAICS 2012, there are 28 different 
size standards, covering 1,031 industries and 16 ``exceptions.'' Of the 
1,047 corresponding size standards including exceptions, 533 are based 
on average annual receipts, 509 on number of employees (one of which 
also includes barrels per day total capacity), and five on average 
assets.
    Over the years, SBA has received comments that its size standards 
have not kept up with changes in the economy, in particular the changes 
in the Federal contracting marketplace and industry structure. The last 
time SBA conducted a comprehensive size standards review was during the 
late 1970s and early 1980s. Since then, most reviews of size standards 
were limited to a few specific industries, mostly with receipts based 
size standards, in response to requests from the public and from 
Federal agencies. SBA reviews all monetary based size standards (except 
for statutorily set size standards in NAICS Sector 11) for inflation at 
least once every five years. SBA's latest inflation adjustment to the 
monetary based size standards was published in the Federal Register on 
June 12, 2014 (79 FR 33647). However, the vast majority of employee 
based size standards have not been reviewed since they were first 
established.
    Because of changes in the Federal marketplace and industry 
structure since the last comprehensive size standards review, SBA 
recognizes that current data may no longer support some of its existing 
size standards. Accordingly, in 2007, SBA began a comprehensive review 
of all size standards to determine if they are consistent with current 
data, and to adjust them when necessary. In addition, on September 27, 
2010, the President of the United States signed the Small Business Jobs 
Act of 2010 (Jobs Act), 111 Public Law 240, 124 Stat. 2504, Sep. 27, 
2010. The Jobs Act directs SBA to conduct a detailed review of all size 
standards and to make appropriate adjustments to reflect market 
conditions. Specifically, the Jobs Act requires SBA to conduct a 
detailed review of at least one-third of all size standards during 
every 18-month period from the date of its enactment. Id. at Sec.  
1344(a)(1)(A). In addition, the Jobs Act requires that SBA review all 
size standards not less frequently than once every five years 
thereafter. Id. at Sec.  1344(a)(2). Reviewing existing small business 
size standards and making appropriate adjustments based on the latest 
available data are also consistent with Executive Order 13563 on 
improving regulation and regulatory review.
    Rather than review all size standards at one time, SBA is reviewing 
size standards on a Sector-by-Sector basis. A NAICS Sector generally 
includes 25 to 75 industries, except for NAICS Sector 31-33, 
Manufacturing, which has considerably more industries. This final rule 
covers industries with employee based size standards that are not part 
of NAICS Sector 31-33 (Manufacturing), Sector 42 (Wholesale Trade), or 
Sector 44-45 (Retail Trade). These include one industry each in NAICS 
Sector 11 (Agriculture, Forestry, Fishing and Hunting), Sector 22 
(Utilities), and Sector 52 (Finance and Insurance), 25 industries in 
Sector 21 (Mining, Quarrying, and Oil and Gas Extraction), 15 
industries in Sector 48-49 (Transportation and Warehousing), 12 
industries in Sector 51 (Information), two industries and four sub-
industries (``exceptions'') in Sector 54 (Professional, Scientific and 
Technical Services), and one sub-industry (``exception'') in Sector 56 
(Administrative and Support, Waste Management and Remediation Services) 
that currently have employee based size standards. Once SBA completes 
its review of size standards for industries in a NAICS Sector, it 
issues a proposed

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rule to revise size standards for those industries based on latest 
industry and program data available and other relevant factors, such as 
current economic climate and SBA's and other government's programs and 
policies to help small businesses.
    As part of the ongoing comprehensive size standards review, SBA 
also developed a ``Size Standards Methodology'' White Paper for 
developing, reviewing, and modifying size standards, when necessary. 
SBA published the document on its Web site at www.sba.gov/size for 
public review and comments, and included it as a supporting document in 
the electronic docket of the proposed rule at www.regulations.gov.
    In evaluating an industry's size standard, SBA generally examines 
its characteristics (such as average firm size, startup costs and entry 
barriers, industry competition, and distribution of firms by size) and 
the small business level and share of Federal contract dollars in that 
industry. SBA also examines the potential impact a size standard 
revision might have on its financial assistance programs, and whether a 
business concern under a revised size standard would be dominant in its 
industry. SBA analyzed the characteristics of each industry in this 
final rule, mostly using a special tabulation obtained from the U.S. 
Bureau of the Census from its 2007 Economic Census (the latest 
available). The industry data in the Economic Census tabulation are 
limited to the 6-digit codes and do not permit the evaluation of size 
standards for sub-industry categories or ``exceptions.'' Thus, as 
explained in the proposed rule, when establishing, reviewing, or 
modifying size standards for ``exceptions,'' SBA evaluates the data 
from the U.S. General Service Administration's (GSA) Federal 
Procurement Data System--Next Generation (FPDS-NG) and System of Awards 
Management (SAM) databases. In this final rule, SBA used the data from 
FPDS-NG and SAM to determine industry and Federal contracting factors 
for ``Information Technology Value Added Resellers,'' which is an 
exception under NAICS 541519, Other Computer Related Services, and for 
``Environmental Remediation Services,'' which is an exception under 
NAICS 562910, Remediation Services.
    SBA also evaluated the small business level and share of Federal 
contracts in each industry using the data from FPDS-NG for fiscal years 
2009-2011 for the proposed rule and fiscal years 2012-2014 for this 
final rule. To evaluate the impact of changes to size standards on its 
loan programs, SBA analyzed internal data on its guaranteed loan 
programs for fiscal years 2010-2012 for the proposed rule and fiscal 
years 2012-2014 for this final rule.
    SBA's ``Size Standards Methodology'' White Paper provides a 
detailed description of its analyses of various industry and program 
factors and data sources, and how the Agency uses the results to 
establish and revise size standards. In the proposed rule itself, SBA 
detailed how it applied its ``Size Standards Methodology'' to review 
and modify where necessary, the existing employee based size standards 
for industries that are not part of NAICS Sectors 31-33, 42, or 44-45. 
SBA sought comments from the public on a number of issues about its 
``Size Standards Methodology,'' such as whether there are alternative 
methodologies that SBA should consider; whether there are alternative 
or additional factors or data sources that SBA should evaluate; whether 
SBA's approach to establishing small business size standards makes 
sense in the current economic environment; whether SBA's application of 
anchor size standards is appropriate in the current economy; whether 
there are gaps in SBA's methodology because of the lack of current or 
comprehensive data; and whether there are other facts or issues that 
SBA should consider.
    On September 10, 2014 (79 FR 53646), SBA published a proposed rule 
seeking comments on a number of proposals and issues. SBA invited 
comments on its proposals to increase employee based size standards for 
30 industries and three sub-industries (``exceptions'') and decrease 
them for three industries that are not part of NAICS Sectors 31-33, 42, 
or 44-45. SBA requested comments on a number of issues, including 
whether the size standards should be revised as proposed and whether 
the proposed revisions are appropriate. The Agency also sought feedback 
on its proposals to eliminate the Information Technology Value Added 
Resellers (ITVAR) sub-industry (``exception'') under NAICS 541519 
(Other Computer Related Services) and its 150-employee size standard 
and eliminate the Offshore Marine Air Transportation Services sub-
industry or ``exception'' under NAICS 481211 and 481212 and Offshore 
Marine Services sub-industry (``exception'') under NAICS Subsector 483 
and their $30.5 million receipts based size standard. The public was 
also welcome to comment on any other size standards that the Agency 
proposed retaining at their current levels. SBA's analyses supported 
lowering existing size standards for a number of industries. However, 
as SBA pointed out in the proposed rule, lowering size standards would 
reduce the number of firms eligible to participate in Federal small 
business assistance programs and be counter to what the Federal 
government and SBA are doing to help small businesses. Therefore, SBA 
proposed to retain the current size standards for those industries and 
requested comments on whether the Agency should lower size standards 
for which its analyses might support lowering them. Finally, SBA also 
welcomed comments on various methodological issues, including the 
maximum and minimum levels of employees based size standards, industry 
and Federal contracting factors the Agency evaluates and/or suggestions 
on other factors that it should consider when evaluating or revising 
employee based size standards, and whether it should weigh each factor 
equally or it should weigh one or more factors more or less for certain 
industries.

Discussion of Comments

    SBA received a total of 202 comments on the proposed rule, 
including 168 concerning the ITVAR size standard, 32 on the 
Environmental Remediation Services (ERS) size standard, and two 
relating to proposed size standards in general.
    Of the 168 comments relating to the ITVAR size standard, five 
supported SBA's proposal to eliminate the ITVAR exception to NAICS 
541519 and its 150-employee size standard, while the rest opposed it. 
Among those opposing the proposal, two also asked for a 60-day 
extension of the comment period. Of the 168 comments on the ITVAR size 
standard, four were from attorneys, one of which was on behalf of 13 
small business ITVARs and three each on behalf of individual ITVAR 
businesses. One also provided a list of individuals who submitted 
concerns about the SBA's proposed rule to their Congressional 
representatives through a Web site that the company had developed.
    Of the 32 comments on the ERS size standard, nine favored SBA's 
proposal to increase it from 500 employees to 1,250 employees, while 23 
opposed it.
    Among the two general comments, one supported SBA's proposed 
increases to size standards, while the other opposed it. These comments 
and SBA's responses are discussed below.

Comments on SBA's Proposal To Eliminate the ITVAR Exception

    For Federal contracts that combine substantial services with the 
acquisition of computer hardware and software, in

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2002, SBA proposed to establish a new ``Information Technology Value 
Added Resellers (ITVAR)'' sub-industry or ``exception'' category under 
NAICS 541519, Other Computer Related Services, with a size standard of 
500 employees (67 FR 48419 (July 24, 2002)). In the final rule, SBA 
adopted the ITVAR exception under NAICS 541519, as proposed, with a 
size standard of 150 employees (68 FR 74833 (December 29, 2003)). 
Presently, the size standard for NAICS 541519 and other industries in 
NAICS Industry Group 5415, Computer Systems Design and Related 
Services, is $27.5 million in average annual receipts.
    As stated in Footnote 18 to SBA's table of size standards, for a 
Federal contract to be classified under the ITVAR exception and its 
150-employee size standard, it must consist of at least 15 percent but 
not more than 50 percent of value added services. If the contract 
consists of less than 15 percent of value added services, it must be 
classified under the appropriate manufacturing industry. If the 
contract consists of more than 50 percent of value added services, it 
must be classified under the NAICS industry that best describes the 
principal nature of service being procured. In the September 10, 2014, 
proposed rule, SBA proposed to eliminate the ITVAR 150-employee size 
standard exception under NAICS 541519 because, as explained in the 
proposed rule and elsewhere in this final rule, it has created 
inconsistencies, confusion, and misuse. As stated above, SBA received a 
total of 168 comments, with five supporting SBA's proposal to eliminate 
the ITVAR exception and the rest opposing it.

Comments Supporting SBA's Proposal To Eliminate the ITVAR Exception

    Four commenters explicitly supported SBA's proposal to eliminate 
the ITVAR exception. The commenters provided several reasons for their 
support of SBA's proposal. One stated that, due to its dual supply-
services nature, the ITVAR exception has created misuse, confusion, and 
loopholes; removing it would help to ensure that procuring agencies 
comply with SBA's regulations and relevant case law. Others contended 
that the ITVAR exception allows larger businesses making hundreds of 
millions of dollars to bid as small businesses, thereby taking Federal 
opportunities away from true small businesses. One also added that the 
biggest problem is to validate whether the companies are performing 15-
50 percent value added services. While stating that it is important to 
allow ITVARs to compete as small businesses for the Government to 
receive fair and reasonable pricing, the fifth commenter argued that 
predominantly hardware and software contracts with little or no value 
added services are awarded under NAICS 541519 instead of the 
manufacturing NAICS code. These comments and SBA's responses are below.

Comments That the ITVAR Exception Has Created Misuse

    One commenter argued that it has become common for procuring 
agencies to use the ITVAR exception to classify multi-agency contracts 
(MACs) and government-wide acquisition contracts (GWACs) to buy 
commercial off-the-shelf (COTS) IT hardware and software. In many 
cases, these contracts consist of less than 15 percent of value added 
services as required, and should have been classified under the 
appropriate manufacturing (``supply'') NAICS code, the commenter noted. 
Another commenter contended that the biggest problem has been 
validating whether the companies are actually performing the 15-50 
percent value added services and noted that, in most cases, they are 
not providing any service except for tacking on their 10-25 percent 
profit.
    Another commenter mentioned that the real problem with NAICS 541519 
is not the size standard itself, but the general misuse of the code 
altogether. It argued that IT hardware and software procurements in the 
billions of dollars that do not have ``significant'' value added 
services are purchased through NAICS 541519 instead of the 
manufacturing NAICS code. The commenter contended that entire GWACs 
(such as SEWP-IV/V, ECS-3 and new CIO-CS) are awarded under NAICS 
541519 when the majority of items purchased are hardware and software 
only, with little or no value added services at all. The commenter 
urged SBA to stop the fraud, waste and abuse from contracting agencies 
using the wrong NAICS codes in order to get around the size standards. 
The commenter further asked SBA to stop allowing massive GWACs to be 
misclassified under NAICS 541519 so that everyone gets a fair chance to 
compete for those contracts.

Comments That SBA's Proposal Would Have Minimal Impact on Small ITVARs

    One commenter noted that where the greatest portion of the contract 
value is for supplies and a manufacturing NAICS code is selected, the 
size standard for an IT reseller would be only 500 employees, even if 
the applicable size standard for the manufacturing NAICS code was 
higher. The commenter believed that, under these circumstances, the 
elimination of the ITVAR exception would have a minimal impact on 
businesses below 150 employees, as those businesses would continue to 
qualify as small for IT supply contracts under the 500-employee 
nonmanufacturer size standard. The commenter acknowledged that while 
these businesses may be forced to compete with businesses between 150 
employees and 500 employees, it disagreed with many commenters' 
arguments that eliminating the ITVAR exception would force them to 
compete with multi-billion dollar companies.

Comments That the ITVAR Exception Has Created Loopholes

    One commenter argued that the ITVAR exception has created loopholes 
in SBA's regulations, country-of-origin requirements, and trade 
agreements. The commenter added that eliminating the ITVAR exception 
would help to ensure that the procuring agencies comply with applicable 
regulations and requirements. The commenter explained that SBA's 
regulations require procuring agencies to select the ``NAICS code which 
best describes the principal purpose of the product or service being 
acquired.'' Where both products and services are being acquired, the 
commenter continued, the acquisitions must be classified according to 
the component which accounts for the greatest percentage of the 
contract value. Thus, the commenter stated, the procuring agency must 
identify whether the contract is primarily for the acquisition of 
services or supplies, and noted that the relevant case law (SBA No. 
SIZ-1295(1979)) also supports this. The solicitation must contain only 
one NAICS code and one size standard, and for a contract requiring the 
performance of a combination of work, a contracting officer must 
identify whether the contract is one for services, construction, or 
supplies for purposes of applying the performance of work requirements 
under the ``limitations on subcontracting'' provisions, the commenter 
concluded.
    The same commenter argued that when agencies set-aside acquisitions 
using the ITVAR exception, it creates loopholes that allow agencies to 
bypass the NMR and limitations on subcontracting, which are intended to 
ensure that small business is the ultimate beneficiary of such 
acquisitions instead of a large original equipment manufacturers (OEMs) 
or systems integrators. The commenter further contended that because 
the ITVAR exception is part of a services NAICS code, the NMR does not 
apply to ITVAR

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contracts even if, by definition, supplies are the majority component 
of those contracts. This allows IT resellers to provide the products 
under the set-aside acquisitions from large businesses, including 
foreign-based businesses, the commenter explained. The commenter 
further argued that restricting acquisitions for IT products to small 
businesses under the ITVAR exception also eliminates the country-of-
origin requirements under both Trade Agreements and Buy American Acts, 
thereby granting non-designated countries an avenue to supply products 
to the U.S. government. Without the NMR, the requirement to furnish the 
end item of a U.S. small business is also eliminated, the commenter 
concluded.

Comments That the ITVAR Exception Has Caused Adverse Impact on True 
Small Businesses

    One commenter noted that there are numerous large businesses hiding 
under the ITVAR exception, taking business away from true small 
businesses. The commenter added that the problem also exists in the 
subcontracting area where large businesses use these large value added 
resellers instead of true small businesses. Another commenter argued 
that the exception creates an unequal playing field as it allows 
companies making hundreds of millions of dollars a year to bid as small 
businesses on ITVAR contracts, essentially blocking true small 
businesses from those opportunities. These companies are much larger 
than true small businesses and have access to vast resources to assist 
them in their Request For Proposal responses, the commenter stated. 
Removing the exception will help level the playing field for companies 
bidding for opportunities under NAICS 541519, the commenter added. 
Another commenter contended that a small business is the one with $27.5 
million in sales, not the one with 150 employees. There are many 
companies serving the Federal market that win contracts based on having 
just 150 employees with annual receipts of $200 million to $800 
million, the commenter continued. The commenter concluded by suggesting 
that to make the size standard more inclusive and see more 
participation of small businesses in the Federal market, the size 
standard for NAICS 541519 should be $50 million in receipts.
    The commenters supporting SBA's proposal shared the Agency's 
concerns that the exception has created inconsistencies, confusion, 
misuse, and loopholes. They explained that to treat ITVAR contracts as 
service contracts when, by definition, they are supply contracts, is 
inconsistent with SBA's regulations that require procuring agencies, 
based on the principal purpose of the service or product being 
procured, to identify the procurements either as service contracts or 
as supply contracts, but not both. The commenters added that the dual 
service-supply nature of ITVAR contracts has also created confusion 
with respect to compliance with SBA's regulations, such as limitations 
on subcontracting and the NMR. They contended that, given the 
inapplicability of the NMR for the exception, ITVARs are allowed to 
provide the products under the set-aside acquisitions from large 
businesses, including OEMs and foreign-based businesses, thereby 
defeating the very intent of the small business set-aside programs. The 
commenters also shared SBA's concerns that the agencies use the ITVAR 
exception and its 150-employee size standard to acquire computer 
hardware and software with limited value added services, which could 
have been classified under the manufacturing NAICS codes, thereby 
requiring them to comply with the NMR.

SBA's Response

    Regarding commenters' concerns about the misuse of NAICS 541519, 
SBA agrees that the ITVAR exception has allowed Federal agencies to use 
NAICS 541519, instead of manufacturing NAICS codes, for computer 
hardware and software procurements that do not have ``significant'' 
value added services. SBA's proposal to eliminate the exception was 
intended to address this issue.
    However, SBA disagrees with the suggestion that the size standard 
for NAICS 541519 should be increased to $50 million in receipts to 
increase small business participation in the Federal market. The 
results of industry and Federal procurement data published in the 
proposed rule (76 FR 14323 (March 16, 2011)) and final rule (77 FR 7490 
(February 10, 2012)) on NAICS Sector 54 supported $25.5 million in 
average annual receipts (now $27.5 million due to inflation adjustment) 
as the size standard for all industries in NAICS Industry Group 5415, 
including NAICS 541519. Data do not support the suggested $50 million 
as the size standard for NAICS 541519, and SBA is also concerned that 
such a high size standard would negatively impact the ability of small 
businesses below the current size standard to compete for Federal 
opportunities. As part of its quinquennial comprehensive review of size 
standards as required by the Jobs Act, SBA will review all size 
standards in the coming years and make necessary adjustments to reflect 
the latest industry and Federal market data.

Comments Opposing SBA's Proposal To Eliminate the ITVAR Exception

    Most commenters argued SBA's proposal to eliminate the ITVAR 
exception and its 150-employee size standard and apply the $27.5 
million receipts based size standard to ITVAR contracts would have 
negative impacts on both many small businesses and on Federal programs. 
Many contended that a receipts based size standard is not appropriate 
for the ITVAR industry and SBA's justification to establish the ITVAR 
exception and the 150-employee based size standard in its 2003 final 
rule is still valid. A large majority of the commenters questioned the 
SBA's conclusions based on the 2007 Economic Census data that the 
proposed rule would have a minimum impact on businesses between the 
150-employee size standard and the $27.5 million receipts based size 
standard. Many contended that SBA did not provide in the proposed rule 
a detailed analysis of the ITVAR industry and the data to support its 
reasons that the ITVAR exception has created inconsistencies, 
confusion, and misuse. Many stated that there has been no material 
change in the ITVAR industry since the 2003 final rule, thereby a 
change to the size standard is not warranted. A few commenters argued 
that the proposed rule also violates the statutory requirements under 
the National Defense Authorization Act for Fiscal Year 2013 (NDAA 
2013), Regulatory Flexibility Act (RFA) and Small Business Regulatory 
Enforcement Fairness Act (SBREFA), while a few others also argued the 
rule is also against the intent of the Jobs Act. One commenter argued 
that SBA's proposal to eliminate the ITVAR exception runs counter to 
its decision to retain all other exceptions in other industries. 
Several commenters suggested that SBA should not proceed with the 
proposal until it conducts a detailed analysis of the ITVAR industry, 
while others advocated alternative measures to address the issues of 
inconsistencies, confusion, and misuse instead of eliminating the 
exception. These comments and SBA's responses are detailed below.

Comments That the Proposed Rule Would Have Adverse Impacts on Small 
Businesses

    Most commenters argued that the SBA's proposed rule to eliminate 
the ITVAR exception and its 150-employee size standard (some referred 
to Footnote 18) and apply the $27.5 million receipts based size 
standard for NAICS 541519

[[Page 4440]]

to ITVAR contracts would have a devastating impact on many small 
businesses that are below the 150-employee size standard, but above the 
$27.5 million receipts based size standard. The commenters added that, 
if the ITVAR exception and its 150-employee size standard were 
eliminated, numerous companies (some said thousands) would become 
ineligible to compete for small business set-asides or reserves 
programs under DHS's FirstSource II, NASA's SEWP V and other GWAC or 
MAC vehicles because they easily exceed the $27.5 million receipts 
based size standard for NAICS 541519 due to high volumes and costs of 
products/goods sold under ITVAR contracts.
    Many commenters argued that, without Footnote 18, the proposed rule 
would subject ITVAR firms to the $27.5 million receipts based size 
standard for NAICS 541519. The commenters claimed the proposed rule 
would make those firms lose their small business status, thereby 
forcing them to compete for computer hardware and software contracts 
with larger IT companies (including OEMs) with 500 employees to 1,000 
employees and receipts in billions of dollars. Some commenters noted 
this would benefit large contractors, as small ITVARs do not have 
resources to compete with those large companies. One commenter 
acknowledged that small ITVARs are able to compete against large 
companies with hundreds of thousands of employees and against OEMs that 
sell IT products and services directly to the Government. However, 
several argued that this would reduce their ability to serve government 
customers or would even potentially force them out of the Federal IT 
marketplace entirely. Some commenters noted this would force them to 
downsize their businesses, which may limit business growth and small 
business job creation. A few other commenters claimed this would make 
many IT service companies ineligible for the type of contracts they 
have been performing over the years.
    Numerous commenters stated that many small ITVARs seeking 
opportunities in the Federal IT marketplace do a significant amount of 
Federal business utilizing the ITVAR exception under NAICS 541519. They 
added that a considerable amount of money is allocated to the NAICS 
541519 exception and it is not fair to take those opportunities away 
from small businesses. The proposed change, if adopted, the commenters 
indicated, would be detrimental to those businesses and Federal 
agencies that depend on them, because many small ITVARs would no longer 
be able to compete for Federal opportunities under NAICS 541519 as 
small businesses. Some seemed concerned that the loss of revenue would 
destroy many small ITVARs and force them to close their businesses, 
while others noted that this would have a negative impact on employment 
and economic growth in the region, including the Historically 
Underutilized Business Zones (HUBZones).
    Some commenters stated that, without Footnote 18, ITVAR contracts 
would be classified either as a services contract under the $27.5 
million receipts based size standard or as a supply contract under the 
NMR. They claimed that small ITVARs would become ineligible for 
services contracts because they exceed the receipts based size standard 
and for supply contracts, they would have to compete with larger 
businesses. One commenter noted that currently the ITVAR exception 
benefits ITVAR firms in three ways: (i) It enables them to sell 
supplies as a small business concern without the NMR, compliance of 
which is complicated and cumbersome, (ii) it shields the firms from 
competition with firms that have between 151 employees and 500 
employees, and (iii) it has enabled ITVARs to sell some services as 
small businesses even though they exceed the receipts based size 
standard. The commenter argued that the proposed rule would wipe out 
all these benefits. As all IT supplies contracts would be under the 
NMR, ITVARs would have to compete with much larger companies for small 
business supplies contracts. In addition, ITVARs that exceed the 
receipts based size standard, could not compete for small business 
services contracts.

SBA's Response

    SBA disagrees with commenters' interpretation that with the 
proposed elimination of the ITVAR exception and its 150-employee size 
standard, many businesses would lose their small business status 
because they exceed the $27.5 million receipts based size standard 
associated with NAICS code 541519. These comments indicate that there 
was some confusion concerning the impact of SBA's proposal, if adopted, 
on current small ITVARs. Many commenters incorrectly believed that, if 
the exception is eliminated, all contracts that currently use the ITVAR 
exception and 150-employee size standard would be subject to the $27.5 
million receipts based size standard for NAICS 541519 and that many 
ITVARs with 150 or fewer employees would lose their small business 
status and hence become ineligible to bid on those contracts because 
they have annual receipts above $27.5 million. Some misunderstood SBA's 
proposed elimination of the ITVAR exception to change the size standard 
for procurement of IT products from 150 employees to $27.5 million in 
average annual receipts. As stated in the proposed rule, if the ITVAR 
exception is eliminated, all ITVAR contracts would be reclassified 
under the employee based size standard for the manufacturing industries 
or under the 500-employee nonmanufacturer size standard. By definition, 
the ITVAR exception is for contracts that are primarily supply 
contracts, with some services. The $27.5 million receipts based size 
standard is for contracts that are primarily service contracts, which 
is not the case under the exception. Accordingly, for IT supply 
contracts using the manufacturing size standards, the 500-employee 
nonmanufacturer size standard, and other elements of the NMR, would 
also apply. Thus, all firms that currently qualify under the 150-
employee ITVAR size standard would continue to qualify for such 
contracts as small businesses under the 500-employee nonmanufacturer 
size standard.
    In response to concerns that by eliminating the ITVAR exception and 
reclassifying ITVAR contracts under the manufacturing NAICS codes it 
would mainly benefit large companies with 500 employees to 1,000 
employees, SBA analyzed the FPDS-NG data on IT supply contracts under 
NAICS Industry Group 3341, Computer and Peripheral Equipment 
Manufacturing. For fiscal years 2012-2014, the results showed that 
about 76 percent of dollars awarded to small businesses under NAICS 
Industry Group 3341 went to firms with 150 or fewer employees. Thus, 
the results do not support the argument that IT supply contracts would 
be dominated by larger companies if they are reclassified under the 
manufacturing NAICS codes. Additionally, while many commenters 
expressed concerns for having to compete with large companies if the 
exception is eliminated, several also noted that small ITVARs have 
capabilities and resources to outcompete large companies and to provide 
the best solution to the government. ITVARs would continue to benefit 
from those attributes if ITVAR contracts were reclassified under the 
manufacturing NAICS codes.
    Some commenters contended that the proposed rule would cause 
thousands of small businesses to lose their small business status and 
become ineligible to compete for ITVAR contracts as small businesses. 
SBA disagrees for three

[[Page 4441]]

reasons. First, the commenters did not provide any data or data sources 
to support their claim that thousands of businesses will be affected. 
Second, as explained above, no ITVAR firms below 150 employees would 
actually lose their small business status under the proposed rule, 
because they would continue to qualify to compete for those contracts 
as small businesses under the 500-employee nonmanufacturer size 
standard. Third, SBA reviewed commenters' data on companies receiving 
contracts under various GWACs and tasks orders under the ITVAR 
exception and similar data that it compiled from other GWACs (such as 
GSA's Schedule 70 SIN 132-8) using FPDS-NG for fiscal years 2012-2014. 
The data showed that, of about 260 firms receiving contracts under 
those GWACs during fiscal years 2012-2014, about 60 or 25 percent had 
more than the $27.5 million in receipts but fewer than 150 employees. 
However, the proposed rule would have no impact on their small business 
status under the receipts based size standard for NAICS 541519. 
Moreover, of total contract dollars received by firms between the $27.5 
million receipts level and 150-employee level during fiscal years 2012-
2014, nearly half (46 percent) were from contracts they received under 
NAICS codes other than NAICS 541519. SBA agrees that, if the exception 
were eliminated, firms that currently qualify as small for ITVAR 
contracts would have to compete with larger companies with between 150 
employees and 500 employees under the nonmanufacturer size standard, 
but the relevant data does not support that the impacts would be as 
detrimental as those characterized by the commenters. However, this was 
an important factor for the SBA's decision to maintain the current 150-
employee size standard in this final rule.
    In response to concerns that the proposed rule would wipe out the 
benefit the ITVAR exception provides to ITVAR firms by enabling them to 
sell supplies under small business set-aside contracts without the NMR, 
SBA believes that, similar to all other small business supply 
acquisitions, all small business acquisitions for computer hardware and 
software, including those classified under the ITVAR exception must 
also comply with the NMR. The arguments that the compliance with the 
NMR is complicated and cumbersome are not valid reasons for not 
following statutory provisions. It should be noted that the proposed 
rule would have no impact on qualifying as small for contracts that are 
primarily for services classified under the receipts based size 
standard for NAICS 541519. ITVAR firms that exceed the receipts based 
size standards currently would continue to be ineligible for IT 
services contracts, regardless of whether the ITVAR exception is 
retained or eliminated. Thus, SBA disagrees with the argument that the 
proposed rule would make ITVAR firms lose their eligibility to compete 
for IT services contracts under the receipts based size standard.

Comments That the Proposed Rule Would Have Adverse Impacts on Federal 
Agencies

    Numerous commenters noted that Federal agencies set aside billions 
of dollars for small businesses under NAICS 541519 using the ITVAR 
exception and 150-employee size standard. The commenters identified 
several multi-year, multiple award IDIQ contracts that are currently 
set aside to small businesses to procure computer hardware and software 
and services, including DHS' FirstSource, Army's ITES-3H, NASA's SEWP, 
and NIH's CIO-CS programs. They argued that SBA's proposed rule would 
have a devastating impact on those Federal programs and small 
businesses that depend on them.
    Several commenters argued that SBA's proposal to eliminate the 150-
employee size standard and retain the $27.5 million receipts based size 
standard would render ineligible the vast majority of small businesses 
currently performing ITVAR contracts under the above programs. 
According to the commenters, there would not be enough qualified small 
businesses under the $27.5 million receipts based size standard to 
perform large volumes of complex ITVAR contracts. This would force, the 
commenters claimed, the agencies to procure such contracts directly 
through OEMs or classify them under NAICS codes where businesses with 
1,000 or 500 employees are considered small. Some commenters contended 
that the SBA's proposed change would curtail the Government's ability 
to count on a reliable small business industrial base to provide these 
IT products and services, while others claimed that it would eliminate 
significant depth of products and services the Government receives from 
small ITVARs.
    While some commenters seemed wary of having to compete with OEMs if 
the exception is removed, many others noted that most ITVARs have 
relationships with hundreds of OEMs, thereby enabling them to obtain 
the most competitive pricing for a given product and provide the best 
solution to a customer need by combining the best mix of products from 
multiple OEMs. One commenter stated that approximately 75 percent of 
Federal sales of many leading OEMs are fulfilled through their ITVAR 
partners. The same commenter argued that, without Footnote 18, this 
value-added ability of ITVARs will be lost, because the majority of 
ITVARs will no longer qualify as small businesses and likely be unable 
to compete against large businesses.
    Several commenters argued that SBA' proposal, if adopted, would 
decrease the pool of responsible and qualified contractors for ITVAR 
acquisitions, as companies below the $27.5 million receipts based size 
standard lack financial resources, technical capabilities, experiences, 
and qualified personnel to meet the requirements. The commenters noted 
that the receipts based size standard would limit the government's 
ability to receive competitive pricing for a wide variety of products 
and services, because businesses at the $27.5 million receipts level 
have no buying power to leverage OEM cost down and qualified personnel 
to obtain the OEM certification to be able to resell, obtain discounts 
and provide authorized services. Thus, the commenters claimed, the 
companies with annual receipts of $27.5 million cannot effectively 
compete with large companies for Federal IT requirements, but ITVARs 
with higher revenue can. Some commenters claimed that the ITVARs have 
the revenue base and creditworthiness to purchase millions or tens of 
millions of dollars of products and that the companies with less than 
$27.5 million revenue are unable to obtain credit facilities necessary 
to purchase the product component of the solution. Several commenters 
argued that, if ITVAR contracts are subject to the $27.5 million 
receipts based size standard, agencies would not be able to use NAICS 
541519 to procure a mix of services and large volumes of computer 
hardware and software.
    Some commenters argued that the ITVAR exception has helped the 
Federal government to obtain information systems to improve efficiency 
and reach its goals. Small ITVARs provide, they explained, integrated 
solutions to complex IT challenges, allowing agencies to focus on their 
missions, and eliminating the ITVAR exception would negatively impact 
the delivery of these solutions and thus the missions of the agencies. 
One commenter claimed that small ITVARs play a significant role in 
maximizing Federal small business utilization, while another noted that 
the elimination of Footnote 18 will negatively impact the recent 
progress

[[Page 4442]]

made toward meeting the Federal government small business contracting 
goal.

SBA's Response

    SBA does not agree with the commenters' contention that the 
proposed rule would have a devastating impact on Federal programs and 
small businesses that depend on them. As stated earlier in this 
preamble, under the proposed rule, not a single ITVAR firm below 150 
employees would lose its small business status to qualify for ITVAR 
contracts as small businesses. Moreover, a size standard change would 
have no impact on small business status for current contracts; it would 
only affect future contracts. If Footnote 18 were removed as proposed, 
ITVAR contracts, which are by definition supply contracts, would be 
reclassified under a higher manufacturing size standard along with the 
500-employee nonmanufacturer size standard. As a result, all currently 
small ITVARs would continue to qualify as small businesses to provide 
exactly the same products and services they are currently providing to 
the Federal government under the ITVAR exception.
    SBA also does not agree with the concerns that, under the proposed 
rule, there would not be enough qualified small businesses below the 
$27.5 million receipts based size standard for the Government to choose 
from to perform large volumes of complex ITVAR contracts. First, if the 
exception is removed, ITVAR contracts would be reclassified under one 
of the manufacturing NAICS codes, with the higher manufacturing size 
standard along with the 500-employee nonmanufacturer size standard, not 
the $27.5 million receipts based standard for NAICS 541519. Second, 
because additional ITVARs between 150 employees and 500 employees could 
also compete on those contracts as small businesses, there would 
actually be more small businesses, not fewer, available for the 
agencies to choose from. Therefore, SBA does not believe that the 
proposed rule would necessarily lead the agencies, due to lack of small 
businesses, to procure IT products directly from OEMs or large 
businesses. SBA also does not believe that this would necessarily have 
any impact on quality or depth of products or services the government 
receives. Every year the agencies allocate billions of dollars to the 
manufacturing NAICS codes and NAICS 423430 (albeit incorrectly) to 
procure computer hardware and software. For example, during fiscal 
years 2012-2014, the Federal government procured computer hardware and 
software and some services valuing nearly $4 billion annually using 
NAICS Industry Group 3341 and NAICS 423430. Almost half (48%) of those 
dollars were awarded to small businesses, of which nearly 75 percent 
went to firms with fewer than 150 employees. Even with the ITVAR 
exception, agencies have used NAICS Industry Group 3341 and other 
manufacturing NAICS codes to classify IT supply acquisitions under 
various GWACs. For example, during fiscal years 2012-2014, NAICS 
Industry Group 3341 accounted for almost all contract dollars under 
NIH's ECS-3 and nearly three-fifths of dollars awarded under Army's 
ITES-2H, and nearly 15 percent under NASA's SEWP IV. Similarly, all 
contracts under Air Force's NETCENTS-2 were classified under NAICS 
334210. The data on companies receiving contracts under various GWACs 
that utilized the ITVAR exception and 150-employee size standard does 
not appear to support the commenters' argument that the companies at or 
below the receipts based size standard lack financial resources and 
personnel to perform ITVAR contracts. During fiscal years 2012-2014, 
there were 155 GWAC contracts (i.e., with dollar awards) set aside for 
small businesses using the ITVAR exception for a total of $5.4 billion 
in dollars obligated. Small businesses below the receipts based size 
standard accounted for more than 70 percent of those contracts and 40 
percent of dollars awarded.
    SBA does not agree with the argument that by losing small business 
status, under the proposed rule, ITVARs would also lose the 
relationships they have with OEMs to be able to provide the Government 
with best mix of products at most competitive prices. As explained 
elsewhere in this rule, even if the exception is removed, because they 
would maintain their small business status for ITVAR contracts under 
the 500-employee nonmanufacturer size standard, there is no reason why 
they would not be able to maintain their relationship with OEMs and use 
that in future contracts. While SBA recognizes that the relationship 
ITVARs have with OEMs plays an important role in the Federal IT 
marketplace, the Agency is concerned with the negative impact it could 
have on many small manufacturers of various IT products, especially 
given the fact that, according to one commenter, almost 75 percent of 
Federal sales of many leading OEMs are fulfilled through their ITVAR 
partners.
    As discussed earlier, if the exception is eliminated, because ITVAR 
contracts would not be subject to the $27.5 million size standard that 
applies to services contracts under NAICS 541519, SBA disagrees with 
the commenters' arguments that the proposed rule would decrease the 
pool of qualified ITVAR contractors. However, these arguments support 
SBA's concerns that having the ITVAR exception under the services NAICS 
code and allowing agencies to include significant services in ITVAR 
contracts may have negatively impacted companies below the receipts 
based size standard by forcing them to compete for small business 
contracts with companies that have much higher revenue base and 
financial resources.
    With respect to the commenter's argument that the ITVAR exception 
plays a role in maximizing small business participation in government 
contracting and meeting the Federal government small business 
contracting goal, SBA considers the share of contract dollars awarded 
to small businesses relative to their share in the overall industry as 
one of the primary factors in determining size standards for specific 
industries. However, whether the government is meeting its small 
business goal is not considered as a factor because that is influenced 
by a myriad of factors, mostly unrelated to size standards. Further, 
agencies can request that SBA waive the NMR, which would enable the 
agencies to set aside the very same acquisitions for small business 
concerns, under the manufacturing NAICS code and utilizing the 
nonmanufacturer size standard of 500 employees. Moreover, class waivers 
already exist for a wide range of IT products under computer and 
peripheral equipment manufacturing related NAICS codes that may cover 
the types of IT products purchased using the ITVAR exception.

Comments That the Proposed Rule Is Contrary to SBA's Previous Rules

    Several commenters argued that the SBA's proposed rule is contrary 
to its justification and analysis it provided in its 2002 proposed rule 
(67 FR 48419 (July 24, 2002)) and 2003 final rule (68 FR 74833 
(December 29, 2003)) for establishing the ITVAR exception and 150-
employee based size standard, as well as its 2011 proposed rule (76 FR 
14323 (March 16, 2011)) and 2012 final rule (77 FR 7490 (February 10, 
2012)) on NAICS Sector 54 (Professional, Scientific and Technical 
Services), where the Agency reaffirmed the 150-employee size standard 
for the exception. The commenters argued that the SBA's 2002/2003 and 
2011/2012 rationale that an employee based size standard, not the 
receipts, was an accurate and appropriate measure of

[[Page 4443]]

small business size for ITVARs is even more appropriate today. One 
commenter stated that selling a combination of computer hardware and 
software and services still exists as a distinctive industry category 
and that it should be retained. Another reiterated several reasons SBA 
provided when establishing the exception in its 2002/2003 rulemaking 
and argued they are still valid today. First, the ITVAR sub-industry 
serves the Federal government's preference to go to a single source to 
obtain IT equipment and supporting services. Second, most acquisitions 
are for numerous IT products, and it is unrealistic to expect one 
manufacturer to produce all of the required items. Third, IT contracts 
often require the contractor to customize the computer hardware or 
install specialized software to meet an individual user's needs. 
Fourth, the new industry category enables agencies to better utilize 
small business preference programs for their IT acquisitions.
    Several commenters were concerned that SBA did not provide any 
explanation or reason why the justification, rationale, or industry 
analyses provided in its 2002/2003 and 2011/2012 rulemakings no longer 
apply in 2014. Commenters suggested SBA provided no facts or reasons 
showing changes in the ITVAR industry and Federal IT procurement to 
justify its proposal to eliminate the employee size standard in the 
current proposed rule. Some commenters argued that because SBA is not 
able to provide a convincing justification for its proposed removal of 
the ITVAR exception it established in the 2002/2003 rulemaking, it 
should retain it. Still some complained that SBA's decision to 
establish the ITVAR sub-industry and its 150-employee size standard in 
2003 was based on a detailed analysis of market and industry data, but 
its current proposal to repeal it without similar analysis or other 
persuasive reasons cannot be justified.

SBA's Response

    As the result of the review of its small business regulations and 
size standards as required by Executive Order 13563 and the Jobs Act, 
SBA now believes that the two key provisions of the 2003 final rule are 
inappropriate, which SBA is attempting to amend through this 
rulemaking.
    First, the Agency's decision in its 2002/2003 rulemaking to place 
the ITVAR exception for supply contracts as a sub-industry category 
under NAICS 541519, a services NAICS code, is inconsistent with NAICS 
industry definitions. Under NAICS, as also noted in the 2003 final 
rule, ITVARs are primarily merchant wholesalers or distributors of the 
computer hardware and software products with a very different 
production function when compared to firms in NAICS 541519. The 
analyses many commenters provided to support their position that ITVAR 
firms have very different revenue and cost structure as compared to 
their counterparts in NAICS 541519 also demonstrate that including the 
ITVAR exception under NAICS 541519 is inconsistent with differences in 
economic realities between the ITVAR industry and NAICS 541519. 
Additionally, as discussed elsewhere in this rule, SBA now finds that 
its approach to creating the ITVAR industry by combining parts of NAICS 
Industry Group 5415 and NAICS 423430 was also not correct.
    Second, the 2003 final rule defined ITVAR contracts as services 
contracts, even if services, by definition, never account for more than 
50 percent of total values of such contracts, thereby exempting them 
from the manufacturing performance requirements and NMR. These rules 
are critical to ensure that small businesses are the ultimate 
beneficiaries of small business set-aside contracts. The statutory 
manufacturing performance requirements and NMR provisions apply to all 
supply contracts, and do not exempt information technology 
acquisitions.
    SBA disagrees with the commenters' argument that the proposed rule 
is against its 2011/2012 rulemaking on NAICS Sector 54. It should be 
noted that SBA's decision to retain the 150-employee based size 
standard for the ITVAR exception under Footnote 18 in its 2011/2012 
rulemaking was not based on the analysis of the relevant industry and 
market data. The SBA's decision to retain the 150-employee size 
standard was only temporary until the Agency reviewed employee based 
size standards. In the same rule, SBA had also retained the employee 
based size standards for NAICS codes 541711 and 541712, which the 
Agency proposed to change in the September 10, 2014 proposed rule.
    SBA does not believe that reclassifying ITVAR contracts under the 
manufacturing NAICS codes would require the agencies to make 
significant changes to the ways they acquire computer hardware and 
software using the ITVAR exception, except that the agencies would be 
required to comply with the NMR. The proposed rule would have 
eliminated the ITVAR sub-industry only as an exception to NAICS 541519, 
but would not have eliminated the ITVAR industry in its entirety from 
the Federal IT market. As explained elsewhere in this rule, the 
proposed rule, would only have led to reclassifying ITVAR contracts 
using applicable manufacturing NAICS codes in which ITVAR firms would 
continue to qualify under the 500-employee nonmanufacturer size 
standard. The nature of the work under ITVAR contracts would remain 
intact. First, current small ITVARs would continue to qualify to 
participate in Federal IT market as small businesses and provide a 
combination of computer hardware and software and services to the 
Federal government. Second, under the NMR, Federal agencies would 
continue to be able to procure multiple products through a single 
distributer or reseller instead of having to go to individual 
manufacturers of different products. Third, classifying acquisitions of 
IT products under the manufacturing NAICS codes along with a higher 
500-employee nonmanufacturer size standard should, in fact, help, not 
hinder, Federal agencies to better utilize small business set-aside 
programs for acquisitions of IT supplies, because agencies would have a 
larger pool of small businesses to draw from to meet their needs.

Comments That the Proposed Rule Lacks Industry Data and Analysis

    Many commenters contended that the proposed rule does not provide 
the required industry analysis and latest economic data to justify the 
removal of the ITVAR exception and its 150-employee size standard 
similar to what SBA provided in its 2003 final rule to establish the 
exception and the size standard. Two commenters argued that the 
proposed rule does not provide the required analyses of the industry 
and competitive environment as required by the statute in support of 
the proposed elimination of the ITVAR exception. One of those two 
commenters also contended that the proposed rule does not provide the 
detailed impact analysis of the proposed change to the ITVAR size 
standard as required by the Regulatory Flexibility Act (RFA). The same 
commenter argued that SBA's rationale that the ITVAR exception has 
resulted in inconsistencies, confusion, and misuse does not in itself 
justify its elimination that will have a substantial impact on a 
significant number of small businesses. Several commenters argued that 
the proposed rule provides no discussion, analysis, data, or valid 
reasons as to why the SBA now considers the proposed approach to be 
appropriate, when in 2002-2003 it established the ITVAR exception and 
considered the receipts based size standard not appropriate for ITVARs.

[[Page 4444]]

Some commenters noted that the proposed rule is based on unfounded 
conclusions and represents an error in judgment that would have dire 
consequences for many small businesses and a number of government 
programs.
    Many commenters challenged the results from the 2007 Economic 
Census data that SBA included in the proposed rule that ``150 employees 
is more or less equivalent to $27.5 million receipts in NAICS 541519 
and that more than 99 percent of firms below the 150-employee level 
will continue to qualify as small under the $27.5 million receipts 
based size standard.'' Using a sample of small ITVARs awarded contracts 
under the various GWAC vehicles (such as DHS's FirstSource II, Air 
Force's NETCENTS-2, and NASA's SEWP V), one commenter countered the 
Economic Census results that the average size of small ITVAR companies 
was about $48 million in receipts and 45 employees and that more than 
50 percent of ITVARs between $27.5 million and 150 employees would lose 
their small business status under the SBA's proposed change. The same 
commenter also stated that 12 of 13 of its small ITVAR clients had 
receipts in excess of $27.5 million (average $123 million) and 
averaging only 50 employees. Using a scenario analysis with various 
percentages of value added services and the average wage for the IT 
sector, another commenter demonstrated that 150 employees is not 
equivalent to $27.5 million in receipts. Another commenter countered 
the Economic Census results by saying that virtually all ITVARs have 
annual receipts exceeding $27.5 million, while employing significantly 
fewer than 150 employees and in many cases fewer than 50. Similarly, 
another contended that the Economic Census (but did not specify which 
Economic Census) shows 72 percent of ITVARs, not 99 percent, would 
qualify as small under the $27.5 million receipts based size standard. 
Several others also claimed that SBA's statements are not supportable, 
but did not provide or suggest the specific data to support their 
claims.
    A number of commenters dismissed the above results as being based 
on the outdated data, arguing that the 2007 economic data has no 
relevance for contracts awarded in 2014 under NAICS 541519, especially 
to ITVAR contracts awarded under the 150-employee size standard. Some 
argued that SBA's results only apply to IT service provider firms in 
NAICS 541519, but not to ITVAR firms, while others contended that SBA 
provides no other recent economic data to support its conclusions from 
the 2007 Economic Census.
    Other commenters also challenged SBA's seemingly conflicting 
statements in the proposed rule. For instance, in one place, SBA stated 
that, based on 2007 Economic Census, 99 percent of small ITVARs will 
retain their small business status under the receipts based size 
standard, while elsewhere in the rule it acknowledged that the Economic 
Census do not provide the data to analyze sub-industry categories or 
exceptions. The commenters argued that this shows SBA lacks an 
understanding of the economic realities and characteristics of the 
ITVAR industry and has no knowledge of the number of small businesses 
receiving contracts under the 150-employee size standard. This led, as 
some commenters contended, SBA to come to the faulty conclusion that 99 
percent of firms below the 150-employee size standard would continue to 
qualify as small under the $27.5 million receipts based size standard.

SBA's Response

    SBA's proposal to remove the ITVAR exception was not driven by the 
analysis of the industry data. Rather, the proposal was primarily 
driven by the need to eliminate obvious inconsistencies, confusion, and 
misuse that the ITVAR exception has created. In response to the 
comments, elsewhere in this final rule, SBA has provided a detailed 
analysis of data on firms receiving ITVAR contracts. Regarding the 
comment relating to the lack of the impact analysis of the proposed 
rule, as part of regulatory impact analysis as required by Executive 
Order 12866 and initial regulatory flexibility analysis (IRFA) as 
required by the RFA, SBA provided the estimate for the number of small 
businesses impacted by changes to industry size standards covered by 
the proposed rule, along with the estimates on the impacts on small 
business participation in Federal procurement and SBA financial 
assistance programs. As in all previous proposed and final rules on 
size standards for other NAICS sectors, SBA only provided the aggregate 
estimates of the impacts for all affected industries, instead of 
separate estimates for each industry or sub-industry.
    As explained in the proposed rule, the Economic Census data SBA 
uses for size standards analysis are limited to the 6-digit NAICS 
industry codes and hence do not provide the data for sub-industry 
categories or ``exceptions,'' including the ITVAR sub-industry. Given 
the lack of data specific to the ITVAR sub-industry, to get some 
general sense about the potential impact the proposed rule would have 
on current small ITVARs, SBA analyzed the 2007 Economic Census data for 
NAICS 541519 because the ITVAR exception is under that NAICS code. That 
analysis suggested that 150 employees is more or less equivalent to 
$27.5 million for firms in that industry. The results also showed that 
99 percent of firms with 150 or fewer employees would have receipts 
below $27.5 million. SBA agrees with the comments that these results 
most likely apply to all firms within NAICS 541519 and not necessarily 
to ITVAR firms, given the differences in economic characteristics 
between the two. In response to the comments, SBA analyzed the data on 
firms receiving ITVAR contracts and other contracts under NAICS 541519 
and Economic Census data for NAICS 541519 and 423430. The results, as 
detailed elsewhere in this final rule, would support the commenters' 
claims that the results for NAICS 541519 do not provide an accurate 
description of ITVAR firms. The results would also support SBA's 
assessment that it would be inappropriate to include the ITVAR sub-
industry as an exception to NAICS 541519.
    With respect to the commenters' challenge to the SBA's statement on 
the equivalence between 150 employees and $27.5 million receipts, it 
should be noted that, using the 1997 Economic Census data, SBA had 
reached a similar conclusion in the 2003 final rule that 150 employees 
is equivalent to the average number of employees of firms under the 
then $21 million receipts based size standard for computer related 
services (NAICS Industry Group 5415) (68 FR 74833). In fact, the 
discussion in the 2003 final rule indicates that the equivalence 
between the receipts based size standard at that time and 150-employee 
level was the key factor for establishing the 150-employee size 
standard for the ITVAR exception, although the vast majority of the 
commenters on the SBA's proposed 500-employee size standard had 
suggested using a 100-employee size standard. Moreover, given the 
equivalence between 150 employees and the then $21 million size 
standard for NAICS Industry Group 5415, in the 2003 final rule, SBA 
even contemplated using the same receipts based size standard for the 
ITVAR industry.
    Regarding some commenters' concerns that SBA's results based on the 
2007 data are outdated and have no relevance to contracts awarded in 
2014, it should be noted that the 2007 Economic Census is the latest 
and most comprehensive industry data available

[[Page 4445]]

to the Agency when the proposed rule was developed and this final rule 
was prepared. The data on the more recent 2012 Economic Census 
tabulation will not be available until late 2016. It should also be 
noted that the SBA's analysis in the 2003 final rule that established 
the 150-employee based size standard for ITVARs was also based on the 
similarly outdated 1997 Economic Census data. As discussed elsewhere in 
the rule, several commenters noted that there has been no material 
change in the ITVAR industry since the 2003 final rule, which bodes 
well with using the 2007 data. Many commenters criticized the 2007 
Economic Census data as outdated, but except for a limited sample data 
on companies receiving ITVAR contracts under some GWACs or some general 
suggestions to look at the data on FPDS-NG and USASpending, commenters 
really did not provide or suggest alternative data to evaluate the 
ITVAR industry.
    In response to the comments, using the data from small business 
goaling reports and FPDS-NG for fiscal years 2012-2014 (the latest 
available when the final rule was prepared), SBA analyzed receipts and 
number of employees for firms receiving contracts under various GWACs 
and task orders that used the ITVAR exception. The results showed, of 
about 260 such firms, about 60 firms had 150 or fewer employees and 
receipts above $27.5 million. Although this figure is higher than the 
one suggested by the 2007 Economic Census, this is quite small relative 
to some commenters' claim that thousands of currently small ITVARs 
exceed $27.5 million and lose their small business status under the 
proposed rule. More importantly, as stated elsewhere in this final 
rule, under the proposed rule, none of the firms between the $27.5 
million receipts level and 150-employee employee level would actually 
lose their small business status because they would continue to qualify 
as small for the IT supply contracts under the 500-employee 
nonmanufacturer size standard. In fact, based on the same data, the 
majority of ITVARs below 150 employees and above $27.5 million receipts 
were already found to have received IT supply contracts as small 
businesses under the 500-employee nonmanufacturer size standard.

Comments That SBA Provides No Evidence for Its Rationale

    Several commenters claimed that SBA provides no evidence, facts, or 
data to support its justification to eliminate the ITVAR exception 
because it has created inconsistencies, confusion, and misuse. One 
commenter noted that there has been no single investigation from the 
GAO or SBA's Inspector General to substantiate the SBA's position. 
Others argued that to eliminate the ITVAR exception, SBA did not 
provide similar data and analyses that the Agency provided in its 2003 
final rule.
    Several commenters dismissed SBA's justification for the proposed 
rule that the ITVAR exception has created some inconsistencies, 
confusion, and misuse as being vague, conjectural, and speculative. In 
response to SBA's statement about the confusion due to the inability of 
contracting officers to identify size standards exceptions in FPDS-NG, 
some commenters suggested that SBA should pursue modification of FPDS-
NG, while others suggested adding an independent ITVAR NAICS code.
    With respect to the SBA's statement that in many cases Federal 
agencies have applied the 150-employee size standard, instead of the 
receipts based size standard, for contracts that were primarily for 
services, thereby benefitting more successful or mid-sized companies at 
the expense of those below the receipts based size standard, one 
commenter noted that misapplications of NAICS codes are not limited to 
Footnote 18 and that SBA did not present any evidence to show that 
Footnote 18 is particular cause of error, while another argued that SBA 
did not provide the data to support its argument. The commenters 
suggested that training and guidance to procurement personnel would be 
a better remedy than eliminating the exception. On the same issue, one 
commenter noted that misuse is not the valid reason to eliminate the 
exception, because it is a training issue and it is SBA's 
responsibility to ensure that the exception is used correctly.
    With regard to the SBA's statement that firms may or may not be 
eligible as small for the exact purchase simply based on the 
contracting officer's selection of the NAICS code and size standard, 
the commenter countered that this is not an issue limited to 
procurements using Footnote 18. The commenter argued that this is the 
nature of the Federal acquisition process, which gives discretion to 
contracting officers in selecting the NAICS code and the size standard.
    With respect to the SBA's assessment that the combination of 
services and supplies in an acquisition is not unique to the IT 
industry, one commenter claimed that the general principle is that 
agencies classify procurements based on the principal purpose of the 
acquisition and that regardless of the relatively high dollar value of 
the IT product component of an ITVAR acquisition, the product is not 
the principal purpose of these acquisitions. Responding to the same 
issue, another commenter contended that SBA fails to account for 
numerous ways the Federal government treats IT purchases differently 
than other types of purchases, as reflected in the TechFAR. The same 
commenter went on to challenge the proposed rule for not addressing the 
concerns that led to the creation of the ITVAR size standard that still 
exist today.
    In response to SBA's language that it is also unclear from the 
terms of the exception itself whether a contract using the ITVAR 150-
employee size standard should be classified as a service contract or a 
supply contract, one commenter noted that with or without Footnote 18, 
NAICS 541519 is a service NAICS code and that, according to the 2003 
rule, the NMR does not apply to small business, 8(a), or HUBZone set-
aside contracts classified under the ITVAR exception.
    Several commenters also challenged the SBA's statement that the 
lack of data on characteristics of firms in ITVAR activities in the 
Economic Census tabulation and FPDS-NG to evaluate the current 150-
employee size standard also justifies the proposal to eliminate the 
ITVAR sub-industry category by arguing that the lack of data or 
government inability to collect or track the data are not valid reasons 
for the elimination of the exception or changing industry size 
standards. Some commenters criticized the Agency for making no attempt 
to obtain the necessary data, while others contended that the lack of 
data to support any change should mean that SBA should take no action 
in the first place. For the data, some commenters suggested either 
splitting the NAICS 541519 or creating a new NAICS code for ITVARs, 
while others suggesting reproducing the analysis from the SBA's 2002/
2003 rulemaking.

SBA's Response

    As stated elsewhere in this rule, SBA's proposal to remove the 
exception was not driven by the analysis of the Economic Census data. 
Rather SBA's proposal was primarily driven by the need to eliminate 
inconsistencies, confusion, and misuse that the ITVAR exception has 
created. In response to the comments, elsewhere in this rule, the 
Agency has provided a detailed analysis of the ITVAR industry, using 
both the Economic Census data and the relevant procurement data.
    As explained in the proposed rule, the major source of confusion 
and misunderstanding with all ``exception'' size standards, including 
the 150-

[[Page 4446]]

employee ITVAR size standard, is that FPDS-NG (https://www.fpds.gov/) 
does not allow contracting offers to enter the specific size standard 
under which the awardee was ``small.'' The only designation they can 
enter is whether the awardee was ``SMALL'' or ``OTHER THAN SMALL.'' For 
example, if a contract under NAICS 541519 was awarded to a ``small'' 
business, the FPDS-NG data do not show whether the awardee qualified as 
``small'' under the regular receipts based size standard or under the 
150-employee ``exception'' size standard. SBA agrees with the 
commenters that such confusion applies to all exceptions, not just the 
ITVAR exception. However, in view of the large value of contracts the 
agencies award each year using the ITVAR exception and the data, as 
discussed below, indicating the inconsistent application of the 
exception in procuring the mix of products and services, SBA is 
particularly concerned with the ITVAR exception.
    Some commenters suggested creating a separate NAICS industry code 
for ITVAR firms with its own size standard to address this issue. 
However, SBA disagrees for two reasons. First, SBA does not have 
authority to create or modify NAICS industry definitions. Second, a 
relevant NAICS code already exists--NAICS 423430 (Computer and Computer 
Peripheral Equipment and Software Merchant Wholesalers). The NAICS 
classifies establishments based on their primary activity. ITVAR firms 
may provide some value added IT services; however, since selling and 
distributing computer hardware and software is their primary activity, 
they are still classified under NAICS 423430. The SBA's 2003 final rule 
also noted that ITVAR firms are basically Computer and Computer 
Peripheral Equipment and Software Merchant Wholesalers. More 
importantly, many commenters also asserted that most of their revenues 
come from the sales of computer hardware and software. Under SBA's 
rules, agencies do not use wholesale or retail NAICS codes for small 
business set-aside supply contracts. Agencies use the manufacturing 
NAICS code that describes the product to be acquired, and firms may 
qualify under the manufacturing size standard or the 500-employee 
nonmanufacturer size standard.
    Confusion also exists with respect to prime contractor performance 
requirements or ``limitations on subcontracting'' (see 13 CFR 125.6 and 
FAR 52.219-14). Since ITVAR contracts contain both services and supply 
(computer hardware) components, it is unclear whether the services or 
supply requirements of the limitation on subcontracting should apply to 
these contracts and whether the prime contractors are meeting those 
requirements. Similarly, confusion also exists both among contracting 
officers and industry participants with respect to the application of 
the NMR for the supply component of the contract. For the same reason, 
it is also difficult to ascertain if resellers provided the supplies 
produced by small domestic manufacturers, large OEMs, or other large 
manufacturers. If the resellers provided the supplies produced 
primarily by the large OEMs or other large manufacturers, without a 
waiver of the NMR that would be inconsistent with the intent of the 
Small Business Act. SBA is concerned that without the compliance with 
the NMR, the ITVAR exception may have allowed small IT resellers to 
simply serve as ``pass throughs'' for large OEMs and other large 
manufacturers. Some commenters stated that as much as 75 percent of 
total sales of many leading OEMs are fulfilled through their ITVAR 
partners.
    With respect to the comment that, according to the 2003 final rule, 
the NMR does not apply to small business set-aside contracts classified 
under the ITVAR exception, SBA now determines that treating ITVAR 
contracts as services contracts and to exempt them from the NMR was an 
error in the 2002/2003 rule, which the agency is attempting to correct 
in the current rulemaking. Additionally, to include the ITVAR firms, 
which are, by NAICS definition, wholesalers and distributors of 
computer hardware and software, as part of a service NAICS code was 
also an error the proposed rule intended to correct. Finally, including 
ITVAR contracts, which are by definition supply contracts, as an 
exception under a service NAICS code was also inconsistent with SBA's 
regulations and NAICS industry definitions. Many commenters also argued 
and provided supporting data that economic characteristics of the ITVAR 
firms are significantly different from those for IT services firms in 
NAICS 541519. This provides further support to the SBA's determination 
in the proposed rule that the ITVAR exception should not be classified 
under NAICS 541519.
    Regarding the comment that the proposed rule does not provide any 
data to support the reason that the ITVAR exception has created misuse, 
it should be noted that SBA's regulations do not require the agencies 
to use the ITVAR exception and its 150-employee size standard. The data 
show that different agencies acquiring the same mix of IT products and 
services are currently using the receipts based size standard, ITVAR 
exception with the 150-employee size standard, or the higher 
manufacturing size standards and nonmanufacturer size standard of 500 
employees. SBA reviewed a sample of procurements posted on the Federal 
Business Opportunities (FBO) Web site at http://www.fbo.gov and found 
that procuring agencies appear to have struggled with selecting the 
appropriate NAICS code, or a size standard for set-aside procurements 
involving the mix of computer hardware and software and services. For 
example, solicitations that seemed to be for equipment, software and 
maintenance used the receipts based size standard, while those that 
appeared to be primarily for maintenance services applied the 150-
employee size standard. Similarly, some solicitations that seemed to be 
primarily for supplies and some services used the receipt based size 
standard instead of the employee based size standard. In some cases, 
both the receipt based and the 150-employee based size standards were 
included. If a contract is primarily a supply contract, along with some 
services, that would qualify for the ITVAR exception, contracting 
officers can still use the higher manufacturing size standards (such as 
1,000 employees for NAICS 334111, Electronic Computer Manufacturing) or 
the 500-employee nonmanufacturer size standard. SBA found several small 
business solicitations involving integration of IT hardware, software 
and services, but the contracting officer used NAICS 334112, Computer 
Storage Device Manufacturing, with a size standard of 1,000 employees, 
instead of the ITVAR exception with 150-employee size standard.
    Some commenters believed that SBA used the lack of data as a reason 
to eliminate the exception, but, as explained in the proposed rule and 
elsewhere in the final rule, the lack of data was not the primary 
reason to eliminate the ITVAR exception. What SBA indicated in the 
proposed rule was that eliminating the exception would also address the 
challenge the Agency faces, due to the lack of data, when evaluating 
the exception size standard in the same manner the Agency evaluates the 
size standards for regular industries using the industry data from the 
Economic Census. For the reasons provided elsewhere in this rule, SBA 
does not agree with the commenters' suggestions for creating a new 
NAICS code for ITVAR firms or reproducing the analysis from the 
Agency's 2002/2003 rulemaking to address the concern for

[[Page 4447]]

the lack of data on the ITVAR exception. First, SBA does not see the 
need for creating a new NAICS code for ITVAR firms, because such a 
NAICS code already exists in NAICS 423430. Second, the analysis SBA 
provided in its 2002/2003 rules has several flaws. In accordance with 
its current size standards methodology, SBA has presented an 
alternative approach to analyzing the ITVAR industry and determining 
its size standard.
    SBA is also concerned that by allowing contracting officers to 
combine services contracts with supply contracts, the ITVAR exception 
might be hurting small businesses that are primarily involved in IT 
services and are below the $27.5 million receipts based size standard. 
The commenters who supported the SBA's proposal also shared these 
concerns. As discussed elsewhere in this rule, after the exception, the 
share of supply dominated contracts in total dollars awarded under 
small business contracts in NAICS 541519 increased sharply at the 
expense of the share of purely services oriented contracts.
    SBA also determines that some of the other reasons the Agency 
provided to create the ITVAR sub-industry category in its 2002/2003 
rulemaking are not unique to the procurement of IT products. For 
example, the SBA's reason that IT acquisitions entail numerous 
products, making it unrealistic to expect one manufacturer to produce 
all products and that the agencies prefer to fulfill their requirements 
from a single source, also hold true for many other acquisitions that 
entail numerous items involving several manufacturers. They are still 
subject to the manufacturing performance requirements and the NMR.

Comments That There Has Been No Change in Federal IT Market or ITVAR 
Industry

    Many commenters argued there has been no material change in the 
ITVAR industry, market conditions, or how the Federal government 
procures IT requirements since the 2003 final rule. Therefore a change 
to the ITVAR size standard is not warranted, they argued. The 
commenters argued that SBA's reasons to create the ITVAR sub-industry 
category are still valid--agencies' preference to procure IT equipment 
and supporting services from a single source; most IT acquisitions 
involve numerous IT products making it unrealistic to expect for a 
single manufacturer to fulfill all requirements; IT contracts require 
services involving customization of hardware and software; and a 
substantial portion of revenue of ITVARs comes from the sale of 
computer hardware and software.
    One commenter noted that in creating the ITVAR exception, SBA 
identified ITVARs as a distinct industry from both IT product 
distributors and IT service providers. The key differentiator was the 
delivery of IT solutions involving both IT products and services, the 
commenter added. The commenter argued that significant changes in the 
IT landscape, especially the cloud, have validated the existence of 
ITVAR industry. The commenter claimed that cloud cannot be effectively 
delivered by a small business under a product based NAICS. Delivering 
cloud to the government is a perfect example of an ITVAR solution and 
the transition from a customer's current environment to the cloud 
requires significant services, the commenter added. ITVARs leverage the 
capabilities of a cloud provider with the addition of their own 
services to support delivery of a solution. The commenter argued that 
by treating an ITVAR contract as a service contract versus a product 
contract tied to the NMR makes small business participation in 
migration to cloud possible.

SBA's Response

    SBA believes that many of the reasons the Agency provided in the 
2003 final rule for creating the exception and the 150-employee size 
standard would remain intact when the ITVAR contracts are reclassified 
under the manufacturing NAICS codes. For example, using the 500-
employee nonmanufacturer size standard, the agencies could still 
fulfill their needs for multiple products and services from a single 
source. Additionally, how ITVAR firms derive their revenues would not 
be an issue under the 500-employee based size standard. However, for 
the reasons discussed below, SBA disagrees with the commenters' 
argument that there has been no material change in Federal IT 
procurement and the ITVAR industry.
    Prior to the exception, agencies procured computer hardware and 
software with some services as supply contracts under the manufacturing 
NAICS codes as long as the supplies remained the largest component of 
the total contract value. The agencies were required to comply with the 
NMR rule if the contracts were set aside for small businesses. For 
procurements that were primarily for IT services, the agencies applied 
one of the computer services related industry codes under NAICS 
Industry Group 5415. The 2003 final rule has resulted in significant 
changes in Federal IT procurement by allowing the agencies to procure 
computer hardware and software with services using the ITVAR exception 
under NAICS 541519. Moreover, the small business ITVAR contracts, 
although by definition they are predominantly supply contracts, are not 
subject to the NMR, thereby allowing small ITVARs to provide products 
from the large manufacturers, including foreign manufacturers.
    In the 2003 final rule, to arrive at the Federal procurement factor 
to determine the ITVAR size standard, SBA used Product and Service Code 
(PSC) Category D ``Information Technology and Telecommunications'' (PSC 
codes D301 through D399) to identify the ``ITVAR type'' contracts 
(i.e., those involving the mix of computer hardware and software and 
services). During fiscal years 2001-2003, such PSCs accounted for more 
than 81 percent of total dollars awarded under small business set-aside 
contracts in NAICS 541519 and about 70 percent for other industries in 
NAICS Industry Group 5415. That figure for fiscal years 2012-2014 
decreased to 40 percent for NAICS 541519 and to 64 percent for other 
industries in NAICS Industry Group 5415. Much of this decrease in NAICS 
541519 could be explained by the increased share of predominantly 
product oriented PSCs, including ADP Software (PSC 7030), ADP Support 
Equipment (PSC 7035) ADP Components (PSC 7050), ADP System 
Configuration (PSC 7010), and ADP Input/Output and Storage Devices (PSC 
7025) that the agencies procure using the ITVAR exception. For example, 
of total small business set-aside dollars awarded in NAICS 541519, the 
share of contracts classified under PSC Group 70 (Automatic Data 
Processing Equipment, Software, Supplies and Support Equipment) 
increased from less than 3 percent during fiscal years 2001-2003 to 41 
percent during fiscal years 2012-2014. That percentage decreased from 
about 9 percent to 3 percent for other industries in NAICS Industry 
Group 5415. During the same period, the average value of dollars 
obligated under the small business set-aside contracts classified under 
PSC Group 70 increased from less than $300,000 to nearly $2.8 million 
for NAICS 541519 and remained stagnant at around $500,000-$600,000 for 
other industries in NAICS Industry Group 5415. SBA believes that most 
of these changes in Federal IT procurement under NAICS 541519 are 
attributable to the ITVAR exception.
    Despite the above facts, SBA's proposal to eliminate the exception 
from NAICS 541519 was not because it believed there have been changes 
to the

[[Page 4448]]

ITVAR industry, or in the Federal IT market. Nor was it based on an 
assumption that the ITVAR industry is no longer relevant. Rather, the 
proposal was to address the inconsistency, confusion, and misuse 
concerning the exception.
    With respect to the argument from one commenter that because of 
``cloud'' services the ITVAR exception is more relevant today, SBA's 
regulations would require the agencies to classify such contracts under 
one of the IT services NAICS codes with the $27.5 million receipts 
based size standard. Using the 150-employee size standard and allowing 
companies that typically have receipts in the range of $50 million to 
$200 million to qualify for a contract whose primary purpose is 
services would negatively impact small businesses at the $27.5 million 
receipts based size standard.

Comments That SBA Should Not Implement the Proposed Rule

    Several commenters argued that the proposed rule should not be 
implemented because it represents a policy error from a judgmental, 
economic, and common sense standpoint. The commenters noted that with 
the absence of applicable, complete and relevant or current data 
regarding the impact of the proposal, the passage of the proposed rule 
would be arbitrary and capricious and constitute the abuse of the SBA's 
rule making authority. The commenters recommended that, to move forward 
with the proposal, SBA should conduct a thorough and detailed analysis 
of the procurement and industry data, evaluate alternatives to 
eliminate the confusion, and misuse, and publish the analysis for 
further industry comment. Specifically, they suggested that SBA analyze 
the current data on multiple award IDIQ contracts being used to procure 
combinations of computer hardware and software and services from the 
FPDS-NG and USASpending to more accurately estimate the number of 
businesses that would be impacted if the proposed rule is adopted. Some 
commenters added that without an adequate justification and analysis, 
SBA's proposed rule would harm small ITVARs and impede the ability of 
Federal agencies to fulfill their needs. Some commenters recommended 
that SBA should delay the proposed rule until it analyzes more current 
economic census data for a more accurate assessment of the impacts the 
rule would have on small ITVARs. One commenter suggested that since the 
ITVAR issue is related to the NMR, SBA should hold the rule until the 
forthcoming proposed rule clarifying changes to NMR rule are finalized. 
ITVARs should be given a chance to consider the impact of the proposed 
change in conjunction with any proposed changes or clarifications to 
the NMR.

SBA's Response

    In response to the comments, elsewhere in the final rule, SBA has 
provided a detailed analysis of the available industry and Federal 
procurement data that are relevant to ITVAR firms. Similarly, SBA has 
also provided a detailed discussion on its position to and analyses of 
various alternatives that the commenters provided to eliminate the 
confusion, and misuse of the ITVAR exception. SBA does not agree with 
the suggestion to delay the proposed rule until SBA analyzes more 
current Economic Census data, which will not be available until late 
2016.
    SBA acknowledges that, if adopted, the proposed rule would have 
some impacts on businesses that currently perform ITVAR contracts under 
the 150-employee ITVAR size standard. Further, agencies would benefit 
by having a bigger pool of firms to compete for IT product contracts. 
The businesses that are currently small under the ITVAR size standard 
would continue to qualify as small, except for that they would need to 
compete with somewhat larger businesses between 150 employees and 500 
employees and comply with the NMR. Without the exception, the agencies 
would reclassify IT supply contracts under the applicable manufacturing 
NAICS codes and be able to fulfill their requirements through a single 
reseller or distributor under the 500-employee nonmanufacturer size 
standard, except for that they would be required to comply with the 
NMR. This is how the agencies were procuring IT products prior to the 
exception. Based on the procurement data analyzed and discussed in this 
rule, SBA does not believe that the impacts from these changes would be 
as detrimental as projected by the commenters.

Comments on the Inapplicability of Manufacturing NAICS Codes and the 
NMR

    Several commenters rejected SBA's statement that, under the 
proposed rule, agencies would reclassify computer hardware and software 
supply contracts under the manufacturing NAICS codes and ITVARs below 
150 employees could qualify under the 500-employee nonmanufacturer size 
standard. They argued that it would not only be unfair to compel ITVARs 
with less than 150 employees to compete with large companies (including 
OEMs) with 500 employees to 1,500 employees, but it would also create 
significant problems for agencies to obtain the best combination of IT 
services, equipment and software in a timely manner. Some noted that 
SBA's assessment in the proposed rule that ITVAR contracts could easily 
transition to product based NAICS codes without significant harm to 
small businesses is incorrect. Others argued that using the 
manufacturing NAICS codes, instead of the ITVAR exception, would create 
an undue burden on small ITVARs by forcing them to compete in various 
manufacturing NAICS codes dominated by much larger companies.
    The commenters expressed various concerns about classifying IT 
supply contracts under the manufacturing NAICS codes with a higher 
employee size standard or 500-employee nonmanufacturer size standard, 
instead of the 150-employee ITVAR size standard. One commenter argued 
that the existence of an alternative purchasing method does not justify 
the removal of a well-established NAICS exception. Some commenters 
stated that manufacturing NAICS codes are not designed to supply IT 
products and do not include value added services that ITVARs offer with 
the products. Others claimed that classifying IT supply contracts under 
the manufacturing NAICS codes would create a significant workload for 
SBA in responding to requests for waivers of the NMR and would 
substantially delay IT procurements.
    Many commenters expressed concerns against classifying IT supply 
contracts under the manufacturing NAICS codes because of the NMR. They 
argued that resorting to a manufacturing NAICS code would force small 
ITVARs to a restrictive nonmanufacturer size standard unless there is a 
waiver from the NMR. The commenters contended that the waiver process 
is cumbersome and in some cases waivers are difficult to obtain in a 
timely manner. They further argued that the NMR would significantly 
limit the number of products a small business could offer to the 
government. This would, as the commenters added, not only restrict the 
small ITVARs from providing the full spectrum of desired products to 
agencies, but would also restrict the government's ability to procure 
the state-of-the-art technology products through small businesses. Some 
commenters argued that, from a practical standpoint, the ITVAR 
contracts would be unlikely to be set aside for small businesses 
because there

[[Page 4449]]

are not many small businesses that manufacture hardware and equipment 
to meet the demand. The commenters argued that if the exception is 
eliminated and contracts to procure computer hardware and software are 
reclassified under the manufacturing NAICS codes, many businesses 
considered small under the exception would not be able to participate 
because it would not be possible to comply with the NMR for every item 
that can be currently sold under the ITVAR exception.
    One commenter noted that, by using the 150-employee ITVAR size 
standard, agencies are currently able to procure multiple IT products 
and services through a single procurement without the requirement to 
supply products manufactured by small business concerns or having to 
secure SBA's waivers for numerous products on the procurement. As the 
commenter continued, the ITVAR exception also allows small resellers to 
offer the most optimum combination of products from both small and 
large manufacturers, thereby providing the best value to the 
government, which would not be possible if they are compelled to offer 
the products from small manufacturers under the NMR. The commenter 
concluded that this can become very complex when there are similar 
products manufactured by small manufacturers that are not compatible 
with other IT equipment or software that must be used in combination to 
best meet agency requirements.
    One commenter noted that if agencies are compelled to use the 
manufacturing NAICS codes to obtain both IT services and products, they 
would run the risk of the NMR delaying the procurement or preclude the 
utilization of the most optimum combination of IT products to meet 
their requirements. The need to justify and obtain waivers from the 
NMR, the commenter claimed, would discourage agencies from setting 
aside IT procurements for small businesses under the manufacturing 
NAICS codes. Thus, the commenter concluded, the elimination of the 
ITVAR exception and its 150-employee size standard could significantly 
reduce the number and magnitude of ITVAR contracts set aside for small 
businesses. Another commenter contended that using the 500-employee 
nonmanufacturer size standard would put small ITVARs (with 50-60 
employees) in direct competition with larger companies with up to 500 
employees. The commenter added that unless a company is allowed to 
separate hardware and software revenue from services for the purpose of 
being small under NAICS Industry Group 5415, very few value added 
resellers would remain small.
    One commenter supporting SBA's proposal argued that it would be 
impossible to comply with the NMR for acquisitions of IT products 
(e.g., software and hardware) even if they are properly classified 
under a manufacturing NAICS code, because many of the IT products 
desired by the government are not manufactured by small businesses and 
do not have waivers. As such, these procurements are fundamentally 
defective because no small businesses could perform the requirements of 
the contract without violating SBA's regulations. The commenter 
suggested that acquisitions for IT products should be competed on a 
full and open basis.

SBA's Response

    If the ITVAR exception is eliminated as proposed and ITVAR 
contracts are reclassified under the manufacturing NAICS codes, the 
size standard for an IT reseller would be only 500 employees, although 
the size standard for computer and peripheral equipment manufacturing 
related NAICS codes is higher at 1,000 employees. While SBA 
acknowledges that these businesses would have to compete with 
businesses between 150 employees and 500 employees, it disagrees with 
the commenters' argument that eliminating the ITVAR exception would 
force them to compete with large companies up to 1,500 employees.
    SBA did not propose to eliminate the ITVAR exception simply because 
there is an alternative method to procure IT supplies using the 500-
employee nonmanufacturer size standard. The proposal was to ensure that 
small business IT supply contracts, like all other supply contracts, 
are in compliance with applicable statute and regulations, especially 
the NMR and limitations on subcontracting. The Small Business Act 
provides that, on a supply contract set aside for small business, the 
offeror must account for 50 percent of the cost of manufacturing the 
product, or qualify as a nonmanufacturer. Under the Small Business Act 
and implementing regulations, a firm may qualify as a nonmanufacturer 
on a supply contract set aside for small business by supplying the 
product of a small business or SBA must have issued a class or 
individual contract waiver of the NMR, which would allow the 
nonmanufacturer to supply the product on any size business. 
Additionally, the rule proposed to eliminate the ITVAR sub-industry 
only as an exception to NAICS 541519, but not the ITVAR activity 
altogether.
    SBA does not agree with the comment that the manufacturing NAICS 
codes are not designed to supply IT products and do not include value 
added services that ITVARs offer with the products. The regulation 
allows agencies to include some services in IT supply contracts 
classified under the manufacturing NAICS codes as long as the products 
remained the principal purpose of the contract. Prior to the ITVAR 
exception, agencies were using the manufacturing NAICS codes to procure 
IT products that required some services. Even now with the exception, 
many agencies procure the mix of IT products and services using the 
manufacturing NAICS codes. As stated elsewhere, even with the ITVAR 
exception, agencies use the manufacturing NAICS codes to obtain 
computer hardware and software through various GWACs, including NIH's 
ECS-3 and Army's ITES-2H.
    SBA does not believe that the waiver process of the NMR is 
cumbersome and that waivers are difficult to obtain in a timely manner 
are good reasons for not applying the statutory rule. SBA believes it 
is inconsistent and unlawful to require distributors or resellers of 
thousands of other products to comply with the NMR and exempt the 
resellers of IT products from the rule. While SBA recognizes that the 
NMR may work better for some products than for others, it strongly 
believes that the rule must apply to all supply contracts equally. 
Thus, similar to all other products and supplies, the NMR must also 
apply to IT products, including those purchased through the ITVAR 
exception. SBA is aware and agrees with some commenters that small 
business manufacturers may not be available to comply with the NMR for 
the procurement of some computer hardware and software. Under those 
instances, the regulations allow agencies to request waivers of the NMR 
from SBA, as they have done for hundreds of other products. In fact, 
waivers already exist for a wide range of IT products under computer 
and peripheral equipment manufacturing related NAICS codes (see https://www.sba.gov/content/class-waivers). However, based on SAM and FPDS-NG 
data, SBA believes that there are small manufacturers for a wide 
variety of IT products, which may have been deprived from Federal 
opportunities under the ITVAR exception because of the inapplicability 
of the NMR to procurements under the ITVAR exception.
    Reclassifying ITVAR contracts under the manufacturing NAICS codes 
would

[[Page 4450]]

not change the agencies' ability to procure multiple IT products from a 
single source. They could continue to acquire multiple products from a 
single source by using the 500-employee nonmanufacturer size standard. 
Similarly, this would also not affect resellers' ability to provide the 
most optimum combination of IT products from multiple manufacturers. If 
the products from small manufacturers are not compatible with other 
hardware and software, agencies may request a waiver of the NMR for the 
items.
    While ITVAR contracts include some services, they are basically 
supply contracts. Thus, according to the SBA's regulations, like all 
other supply contracts, ITVAR contracts should be classified under the 
applicable manufacturing NAICS codes. If such contracts are set aside 
for small businesses, they are also subject to the NMR. If there are no 
domestic small manufacturers of the products being procured to comply 
with the NMR, agencies can request waivers. The potential burden on 
agencies to obtain NMR waivers is not a convincing reason for not 
following the statute, because compliance with the NMR and obtaining 
waivers is ultimately in the interest of small businesses. Similarly, 
the arguments that it would create a significant workload for SBA to 
respond to requests for nonmanufacturer waivers and substantially delay 
IT procurements are not good reasons for not complying with the 
statute. SBA believes that potential delays, if any, resulting from the 
requests for waivers can be ameliorated by proper planning and 
scheduling of contracts. Even if agencies are currently setting aside 
many IT contracts for small businesses using the exception, without the 
NMR, most of the benefits of those contracts are simply passed through 
to large OEMs or other large manufacturers, including foreign 
companies. Many commenters themselves stated that small resellers have 
only small profit margins on ITVAR contracts. SBA disagrees with the 
suggestion to separate revenues from computer hardware and software 
sales from services to allow ITVARs to qualify as small under the 
receipts based size standard. First, for size standards purposes, SBA 
defines the size of a business concern in terms of its overall revenues 
or employees, not in terms of revenues or employees for specific 
products or services. Second, allowing ITVAR firms with revenues 
significantly higher than the receipts based size standard to qualify 
as small would negatively impact businesses below the receipts based 
size standard.
    Finally, with respect to the comment that IT products should only 
be competed on a full and open basis, SBA believes that doing so would 
not only hurt many existing small businesses by forcing them to compete 
with the largest firms, which dominate the industry, it would also 
reduce competition and innovation in the economy.

Comments That the Proposed Rule Violates Statutory Requirements

    One commenter applauded SBA for complying with the Jobs Act, but 
noted that the proposed rule violates the statutory language added to 
the Small Business Act by the National Defense Authorization Act for 
Fiscal Year 2013 (NDAA 2013). The commenter added that the provisions 
in the proposed rule concerning the ITVAR size standard fail to address 
the issues facing the IT industry and the misuse of the size standards.
    The commenter noted that modifications to SBA's size standards have 
significant implications for SBA programs, Federal procurement 
opportunities for small businesses, the Regulatory Flexibility Act, 
Executive Order 12866, and Federal regulatory programs in which the 
term ``small business'' is used. For these reasons, the commenter urged 
SBA to withdraw the current proposed rule and directed it to undertake 
a rulemaking that is legally sufficient, withstands judicial scrutiny, 
and does not tempt Congress to take ameliorative action.
    The commenter was concerned with limiting the number of size 
standards to choose from and applying common size standards for some 
industries. The commenter referred to the SBA's 2011 proposed rule on 
NAICS Sector 54 where the Agency had proposed the common size standards 
for industries in NAICS Industry Group 5413 (Architectural, 
Engineering, and Related Services) and Industry Group 5415 (Computer 
Systems Design and Related Services).
    The commenter claimed that the proposed rule violated the statutory 
provisions of the NDAA 2013 relating to SBA's size standards. 
Specifically, the commenter noted that the proposed rule does not 
follow the statutory provisions of the proposed rulemaking, does not 
honor the statutory prohibition on common size standards, and ignores 
the statutory language on the number of size standards. The commenter 
considered that the proposed rule is fundamentally flawed because SBA 
applied the same methodology prior to NDAA 2013 without any change to 
increase the size standards for 30 industries and three sub-industries, 
and to eliminate the ITVAR sub-industry or exception to NAICS 541519.
    With respect to the statutory provisions of the rulemaking, the 
commenter noted that for the majority of the 30 industries that face a 
changed size standard, the only description provided is the NAICS code 
and industry title. The commenter argued that the proposed rule did not 
provide the types of analyses SBA provided in its 2003 final rule to 
establish the ITVAR exception and the 150-employee size standard.
    The commenter argued that with no justification for the use of the 
``anchor size standard'' approach as a basis for evaluating 
characteristics of individual industries, the proposed rule violates 
the statutory requirement on using common size standards. The commenter 
also challenged the proposed rule for placing the ITVAR firms under one 
of the common size standards created in 2012 that, as the commenter 
contended, prompted Congress to change the statute.
    The commenter noted that by limiting the number of employee based 
size standards to five levels (500 employees, 750 employees, 1,000 
employees, 1,250 employees, and 1,500 employees), SBA disregarded the 
statute in the proposed rule. In response to SBA's approach against the 
practicality and need for establishing separate size standards for each 
of 1,000 plus industries, the commenter indicated that Congress would 
not oppose thousands of size standards as they would provide better 
insights into the small business industrial base, inform the creation 
of better scope of work for contracts, increase opportunities for small 
businesses, and mitigate the impact of outgrowing the size standard.
    Another commenter argued that proposed rule does not comply with 
the RFA. The commenter noted that the RFA, as amended by the Small 
Business Regulatory Enforcement Fairness Act (SBREFA), requires the 
agency to consider the impact of the proposed rulemaking on small 
entities and analyze alternatives to minimize the impacts on small 
entities. The commenter argued that the SBA's IRFA does not include any 
discussion on the impact of eliminating Footnote 18.

SBA's Response

    With respect to the impact of the NDAA 2013 on the comprehensive 
review required by the Jobs Act, SBA maintains its existing approach is 
consistent with those requirements. SBA's methodology, as outlined in 
its publicly available white paper and utilized in each proposed and 
final

[[Page 4451]]

rulemaking, discusses the impact on firms, provides an analysis of the 
competitive environment, discusses the sources of data, and the 
anticipated effect on firms. If SBA proposes common size standards, it 
will and does provide a justification in the proposed and final rule. 
Further, SBA is not limiting the number of size standards. It is 
important to note that much of the data available is based on ranges. 
It is not possible to establish size standards at such a granular level 
that size standards would vary by a single dollar or single employee. 
When conducting economic analysis using varying data sources and 
multiple factors, there must be some rounding to dollar values or 
employee numbers. However, for the review of employee based size 
standards, to the extent permitted by the 2007 Economic Census 
tabulation and other available data, SBA adjusted its size standards 
methodology in response to the NDAA 2013 requirements. Specifically, 
for manufacturing and other industries that have employee based size 
standards for which SBA published the proposed rules on September 10, 
2014, the Agency added an additional size standard level of 1,250 
employees between 1,000 employees and 1,500 employees. In addition, SBA 
increased the number of size standards for industries in Wholesale 
Trade for SBA's financial assistance. Currently, all industries in 
Wholesale Trade have one common size standard of 100 employees for 
SBA's loans. SBA had proposed three additional size levels, namely 150 
employees, 200 employees and 250 employees and published the rule for 
comments (79 FR 28631 (May 19, 2014)). SBA proposed no common size 
standards for any industries that have employee based size standards. 
As part of preparation for the next round of the size standards review 
as required by the Jobs Act, SBA is currently reviewing and updating 
its current ``Size Standards Methodology'' White Paper to incorporate 
the provisions of the NDAA 2013 to the extent possible. SBA plans to 
issue the updated methodology for public comments and finalize it prior 
to launching the next round of size standards review, possibly in the 
first quarter of Fiscal Year 2017.
    SBA disagrees with the comment that the proposed rule did not 
provide any analysis of industry data or the competitive environment to 
the industries that faced a size standard change. As explained in the 
proposed rule and the methodology white paper, when developing the 
proposed rule, SBA examined several factors (such as average firm size, 
measures of start-up costs and barriers, industry concentration, and 
distribution of firms by size) to evaluate the competitive environment 
in specific industries, not just the NAICS industry code and title. In 
addition, SBA also evaluated the Federal contract market place in terms 
of ability of small businesses to compete for Federal opportunities 
under the existing and changed size standards. As part of the 
regulatory impact analysis as required by Executive Order 12866 and the 
IRFA as required by the RFA, SBA provided the impacts of the proposed 
rule, including the number of businesses impacted and their 
participation in Federal contracting and SBA's financial assistance.
    As discussed elsewhere in this rule, based on the review of the 
2003 final rule, SBA has determined that the analysis the Agency used 
to create the exception had several flaws. In response, in this final 
rule, SBA has provided alternative approaches to analyzing the ITVAR 
activity that are more consistent with the SBA's current size standards 
methodology and NAICS industry definitions.
    Since SBA did not receive major adverse comments against using the 
common size standard for industries under NAICS Industry Group 5415 
(Computer Systems Design and Related Services), SBA retained the common 
size standard for those industries in the final rule. Moreover, 
adopting industry specific size standards would have meant lowering 
size standards for some industries in that group. It is not the current 
proposed rule that placed the ITVAR firms under NAICS 541519 that share 
a common size standard with three other computer services related 
industries (i.e., 541511, 541512, and 541513). Rather, SBA decided to 
place the ITVAR exception under NAICS 541519 in its 2002-2003 
rulemaking that created the ITVAR exception. It should be noted that 
SBA created the common size standard for ``Computer Programming, Data 
Processing and Other Computer Related Services'' in the early 1990s (56 
FR 38364 (August 13, 1991) and 57 FR 27907 (June 23, 1992)), not in the 
2012 final rule for NAICS Sector 54.
    With respect to the anchor size standard, it should be noted that 
SBA provides a detailed justification for using the ``anchor size 
standard'' approach in its ``Size Standards Methodology'' White Paper, 
as cited in the proposed rule. In fact, SBA has been using the 
``anchor'' approach since the 1980s when reviewing and modifying size 
standards without much concern from the public. As part of its effort 
to address new statutory requirements and improve the methodology, SBA 
is considering alternative approaches to evaluating industry 
characteristics in the next round of the review.
    Regarding the comment on limiting the number of size standards, 
there have been concerns from businesses and the contracting community 
that size standards are too complex to understand and cumbersome to 
use. To simplify, SBA proposed to reduce the number of receipts based 
size standards to eight (8) from 31 different levels that existed at 
the start of the current size standards review. However, because of 
Agency general policy to not lower size standards except to exclude the 
dominant firms, there are still 17 different receipts based size 
standards in effect. In all proposed rules on receipts based size 
standards, SBA sought comments on the number of size standards 
available to apply for individual industries. Almost all comments 
addressing this issue strongly supported the SBA's proposed eight 
receipts based size standards. Since its publication for comments in 
2009, SBA had received many comments specific to its size standards 
methodology and almost all of those comments supported using a fixed 
number of size standards. Moreover, SBA has received no concerns from 
the public and contracting communities that limiting the number of size 
standards is having an adverse impact on small businesses or 
contracting activities. Additionally, in the proposed rule, SBA did not 
reduce the number of employee based size standards. Rather, as 
mentioned elsewhere in the rule, SBA expanded the number of employee 
based size standards by adding an additional size standard level of 
1,250 employees between 1,000 employees and 1,500 employees. 
Furthermore, in this rule, SBA has lowered size standards for three 
industries from 500 employees to 250 employees to prevent the largest 
and dominant firms from being qualified as small. Until this rule, for 
purposes of Federal procurement, no industry had an employee based size 
standard lower than 500 employees. As stated earlier, SBA is currently 
reviewing and updating its current ``Size Standards Methodology'' White 
Paper (methodology) to incorporate the provisions of the NDAA 2013 to 
the extent possible.
    SBA does not agree with the comment that the proposed rule did not 
provide the impact analysis of the proposed elimination of the ITVAR 
exception. As part of regulatory impact analysis as required by 
Executive Order 12866 and IRFA as required by RFA, SBA provided

[[Page 4452]]

the estimate for the number of small businesses impacted by changes to 
industry size standards covered by the proposed rule, along with 
estimates on the impacts on small business participation in Federal 
procurement and SBA financial assistance programs. As in all previous 
proposed and final rules on size standards for other NAICS sectors, SBA 
only provided the aggregate estimates of the impacts for all affected 
industries, instead of separate estimates for each industry or sub-
industry.

Comments That the Proposed Rule Violates Congress' Intent on the Jobs 
Act

    Five commenters contended that by eliminating the ITVAR exception 
and its higher 150-employee size standard and replacing it with the 
lower $27.5 million receipts based size standard, the proposed rule 
violates Congress' intent in the Jobs Act to increase size standards. 
To support this contention, one of the commenters referred to Section 
404 of the Report from the Committee on Small Business and 
Entrepreneurship where the Committee discussed Federal market 
conditions and the need for a reasonable increase in size standards (S. 
Rep. 343, 111th Cong., 2d Sess. (Sep. 29, 2010)).

SBA's Response

    SBA disagrees for two reasons. First, with the proposed elimination 
of the ITVAR exception, ITVAR contracts, which by definition are 
primarily supply contracts, would be reclassified under applicable 
manufacturing NAICS codes for which all current small ITVARs would 
continue to qualify as small under the 500-employee nonmanufacturer 
size standard. As a result, ITVARs would actually see an increase in 
their size standard, not a decrease. Second, the Jobs Act required SBA 
to conduct a detailed review of size standards and make appropriate 
adjustments to reflect market conditions. SBA believes such adjustments 
would mean either increases or decreases to size standards, not only 
increases. Thus, even if the elimination had resulted in a decrease to 
the size standard, SBA does not believe that would constitute a 
violation of the Jobs Act.

Comments That the Proposed Rule Conflicts With Retention of Other 
Exceptions

    A couple of commenters argued that SBA's reason to eliminate the 
ITVAR exception for lack of data in the Economic Census is inconsistent 
with its decisions to retain all other exceptions in other industries. 
Another commenter was concerned that the same reason may lead SBA to 
eliminate other size standards exceptions that were put in place for 
important reasons, which will negatively impacts those industries and 
Federal customers.

SBA's Response

    As stated elsewhere in this final rule, lack of data was not SBA's 
primary reason for eliminating the ITVAR exception. SBA's primary 
reason for the proposal was to eliminate the inconsistency, confusion, 
and misuse that the exception has created. Only as an ancillary reason, 
SBA noted that the proposal would also ameliorate the challenge SBA 
faces when evaluating economic characteristics and size standards for 
exception categories. The challenge is especially acute here because 
the industry represented by Footnote 18 is already represented in the 
NAICS table under the wholesale NAICS code. In other words, the data 
challenge exists because SBA created an exception for suppliers under a 
services NAICS code.
    As part of its comprehensive review of all size standards, SBA has 
considered whether each of the existing exceptions or footnotes to size 
standards could be eliminated. As a result, SBA eliminated Footnote 1 
relating to the size standard for electric utilities (see 78 FR 77343 
(December 23, 2013), the Map Drafting exception to NAICS 541340 
(Drafting Services) (see 77 FR 7490 (February 10, 2012)), and Aircraft 
Dealers, Retail exception to NAICS 441229 (All Other Motor Vehicles 
Dealers) (see 75 FR 61597 (October 6, 2010)). More recently, in the 
same proposed rule, partly for the lack of data, SBA also proposed 
eliminating the Offshore Marine Air Transportation Services exception 
to NAICS 481211 (Nonscheduled Chartered Passenger Air Transportation) 
and NAICS 481212 (Nonscheduled Chartered Freight Air Transportation and 
Offshore Marine Services exception (along with Footnote 15) to NAICS 
Subsector 483 (Water Transportation).
    Additionally, although SBA, after public comments, has decided to 
retain some of the exceptions in the final rules, the Agency had always 
discussed in the proposed rules the data issues related to evaluating 
all exception categories and associated size standards and sought 
comments if they could be removed. For these reasons, SBA does not 
agree with the commenter that the proposal to eliminate the ITVAR is 
totally inconsistent with its decision to retain other exceptions. In 
addition, SBA did not remove other exceptions mainly because doing so 
would have forced many small businesses to lose their small business 
status as in most cases exceptions have higher size standards than 
those for regular industries. That is not the case with removing the 
ITVAR exception because, as stated elsewhere in the rule, if the ITVAR 
exception is eliminated, the ITVAR contracts would be reclassified 
under applicable manufacturing NAICS codes and all ITVARs below 150 
employees would continue to qualify as small for those contracts as 
small businesses under the 500-employee nonmanufacturer size standard.

Comments Suggesting Alternatives to SBA's Proposal

    In response to SBA's rationale to remove the ITVAR exception 
because it has created inconsistencies, confusion, and misuse, many 
commenters suggested alternative measures or courses of action to 
address these issues rather than eliminating the exception. These 
include modifying FPDS-NG to enable contracting officers to identify or 
show the exception size standard, creating a new NAICS code for the 
ITVAR exception with its own size standard, requiring ITVAR contracts 
and task orders to indicate separate values for goods and services, and 
development of training and guidelines for procurement officials to 
ensure the proper application of the size standard exception.
    With respect to the new ITVAR NAICS code, the commenters suggested 
that SBA should develop a new or independent NAICS industry code to 
represent the ITVAR activity, as defined in Footnote 18, with an 
employee based size standard of 150 employees, while keeping NAICS 
541519 intact with its current $27.5 million receipts based size 
standard. The commenters further recommended that SBA should analyze 
the data on both the multiple award IDIQ contracts used to acquire the 
mix of IT products (hardware/software) and services under NAICS 541519 
and small businesses that are selected to perform these acquisitions to 
support the creation of the new ITVAR NAICS code. One commenter also 
suggested making the new ITVAR NAICS code a service NAICS code, with a 
150 employee size standard. As an alternative to creating a new ITVAR 
NAICS code, one commenter suggested creating a new IT services NAICS 
code with a size standard of 150 employees.
    In response to SBA's reason to remove the exception due to the lack 
of data to evaluate the ITVAR industry, one commenter suggested 
refining the Economic Census to collect data on ITVARs, while another 
suggested

[[Page 4453]]

creating a product service code (PSC) for ITVAR contracts to track data 
on ITVARs in FPDS-NG. Another suggested that SBA should reproduce the 
type of the analysis it did in the 2002-2003 rulemaking by combining 
the data for Computer Systems Design and Related Services (NAICS 
Industry Group 5415) and for the Computer and Computer Peripheral 
Equipment and Software Merchant Wholesalers industry (NAICS 423430) 
from the Economic Census and data from the industry, such as Computer 
Reseller News. In addition, the commenter suggested GSA's Federal 
Supply Schedules for IT solutions and SAM as additional sources of data 
to analyze ITVAR firms. A number of commenters recommended that SBA 
should review the procurement data from FPDS-NG and USASpending.
    Some commenters argued that, rather than eliminating the 150-
employee size standard, the confusion from having two size standards in 
NAICS 541519 could best be cured by eliminating the $27.5 million 
receipts size standard and adopting the 150-employee size standard as 
the single size standard for entire NAICS 541519. On a different note, 
instead of removing the exception and its 150-employee size standard, 
one commenter suggested lowering its size standard to 50, 75, or 100 
employees, without a dollar limit.
    Another commenter argued that, if SBA eliminates the ITVAR 
exception, only the services provided by the small firms should be 
counted in the calculation of annual receipts and hardware and software 
obtained from other suppliers or manufacturers should be excluded. The 
commenter further argued that this is similar to excluding the amounts 
collected for a third party from the receipts by travel agents, real 
estate agents, advertising agents, conference organizers and freight 
forwarders.

SBA's Response

    As explained elsewhere in the rule, SBA does not agree that there 
is the need to create a new NAICS code for ITVARs, because such a code 
already exists in NAICS 423430. The Economic Census data show that more 
than 80 percent of revenues of firms in NAICS 423430 come from the 
sales of computer hardware and software. Many commenters also affirmed 
this by saying that ITVARs' revenue merely reflects the sales of 
computer hardware and software. The SBA's 2003 final rule also stated 
that ITVARs are part of NAICS 423430. Additionally, SBA has no 
authority or expertise to create or modify NAICS industry codes or 
definitions. Creating or modifying NAICS industry definitions or codes 
is done through the U.S. Economic Classification Policy Committee under 
the Office of Management and Budget (OMB) in cooperation with 
statistical agencies from the U.S., Canada, and Mexico. If the industry 
believes that a new NAICS code is warranted for the ITVAR industry, it 
should approach OMB (see http://www.census.gov/eos/www/naics/). Every 
five years, OMB updates NAICS codes and definitions, the next being the 
NAICS 2017 updates to be effective January 1, 2017.
    SBA also disagrees with the suggestion to apply a single size 
standard of 150 employees for both IT services firms in NAICS 541519 
and ITVARs. SBA believes that such a size standard would negatively 
impact small businesses at or below the $27.5 million receipts level by 
forcing them to compete against some ITVARs with significantly larger 
receipts levels and more financial resources. Several commenters noted 
that ITVARs below 150 employees have a much stronger financial base and 
better creditworthiness as compared to their counterparts below the 
$27.5 million receipts based size standard. Without ITVARs, the 
industry data would actually support a 150-employee size standard for 
NAICS 541519. However, to conform to its general policy of using number 
of employees to measure business size of firms in manufacturing 
industries and receipts to measure business size in services 
industries, SBA will maintain the receipts based size standard for 
NAICS 541519.
    Several commenters suggested reproducing the analysis SBA performed 
in its 2003 final rule. However, SBA disagrees with the 2003 analysis 
for the following reasons:
    1. Both the 1997 Economic Census data used in the 2003 final rule 
and 2007 Economic Census data (still latest available) showed vast 
differences between the characteristics of firms in Industry Group 5415 
and those in NAICS 423430. For example, based on the 1997 data, sales 
of computer hardware and software accounted for 81 percent of total 
receipts in NAICS 423430, as compared to less than 5 percent in NAICS 
Industry Group 5415. The corresponding figures for the 2007 Economic 
Census data were about 83 percent and 9.5 percent, respectively. Many 
commenters also argued that firms in NAICS Industry Group 5415 have 
vastly different economic characteristics as compared to ITVAR firms 
and that the two cannot be compared. The commenters further argued that 
most of the receipts of ITVAR firms come from the sales of computer 
hardware and software. Despite these differences, SBA combined the data 
from these very distinct NAICS industry categories into one and defined 
the result as the new ITVAR industry and included it as sub-industry or 
exception under NAICS 541519.
    2. In combining the two industry categories, SBA only included the 
services segment in NAICS 423430, which accounted for only about 14 
percent of total receipts in that industry. The sales of computer 
hardware and software segment, which is the primary activity of ITVARs 
and accounted for more than 80 percent of total sales in that industry, 
were excluded. SBA has reproduced that analysis and determined that, 
had the computer hardware and software segment in NAICS 423430 been 
included in creating the ITVAR industry, the results would have 
supported a substantially larger size standard than 150 employees.
    3. There is no need to create a new industry for ITVAR firms. 
ITVARs, because they are primarily engaged in the distribution or 
resale of computer equipment and software, are already classified under 
NAICS 423430. In the 2003 final rule, SBA selected NAICS Industry Group 
5415 and NAICS 423430 for constructing the ITVAR industry based on an 
assumption that ITVAR firms operate in either one of these categories. 
As reflected in the Economic Census data, some firms in NAICS Industry 
Group 5415 may provide some computer hardware and software, but most of 
their revenue comes from services. Similarly, firms in NAICS 423430 may 
provide some services, but the vast majority of their revenue comes 
from the sales of computer hardware and software.
    4. As discussed exhaustively in this rule, SBA now disagrees with 
the decision to include the exception meant for primarily supply 
contracts as an exception to NAICS 541519, which is a service NAICS 
code. Furthermore, SBA sees no legal basis to treat ITVAR contracts as 
services contracts, thereby exempting them from the manufacturing 
performance requirements and the NMR.
    SBA now believes that, in accordance with SBA's current ``Size 
Standards Methodology,'' any analysis for establishing industry 
characteristics of ITVAR firms should focus on data for NAICS 423430, 
which is their primary industry. All firms in Wholesale Trade (NAICS 
Sector 42) share the same 500-employee size standard for purposes of 
Federal procurement under the NMR. If ITVAR firms need any special

[[Page 4454]]

provisions from the size standard or from the NMR, such provisions 
should be addressed within the context of the same rule. If ITVAR firms 
needed a separate employee based size standard, it should be based on 
data from NAICS Sector 42.
    With respect to data sources, SBA has obtained data from SAM and 
FPDS-NG to evaluate industries or sub-industries (``exceptions'') that 
are not covered by the Economic Census. However, SBA is concerned that 
this data does not provide an accurate and representative picture of 
all firms within the industry. The data from those sources only pertain 
to firms that are either registered in SAM or have received Government 
contracts. The results from these sources generally tend to support 
much larger size standards than those supported by the Economic Census 
data. Some commenters suggested that SBA should use the private data 
sources that SBA used in the 2003 final rule. However, in the 2003 
final rule, SBA considered private sources for data on ITVAR firms, but 
for several reasons as explained in that rule, it did not utilize them 
in establishing the characteristics of the ITVAR industry.
    SBA disagrees with the suggestion for creating a new IT services 
NAICS code with a 150-employee size standard. First, there already 
exist four NAICS codes under Industry Group 5415 to include a wide 
range of IT related services, including those that can be included 
under ITVAR contracts. Second, it would hurt small businesses under the 
$27.5 million receipts based size standard by forcing them to compete 
with businesses with much larger receipts and better financial 
resources. That would likely encourage contracting officers to use the 
150-employee size standard for IT services contracts instead of the 
receipts based size standard. This would not only create more 
confusion, but also would have detrimental impact on small businesses 
that are currently receiving small business contracts under the 
receipts based size standard.
    SBA also disagrees with the suggestion to allow ITVAR firms to 
exclude the revenue from computer hardware and software sales from the 
calculation of receipts, similar to travel agents, real estate agents, 
advertising agents, conference organizers and freight forwarders. In 
calculating receipts for size standards, SBA follows the U.S. Census 
Bureau's definition of receipts for its Economic Census. Accordingly, 
SBA defines receipts for travel agents, real estate agents, advertising 
agents, conference organizers, and freight forwarders based on their 
net commissions by excluding the amount they collect on behalf of the 
third parties. The same definition does not apply to ITVAR firms. 
Additionally, as explained elsewhere, by allowing the ITVAR firms to 
exclude sales from computer hardware and software from receipts and 
qualify under the receipts based size standard would hurt many IT 
services firms below the receipts based size standard.
    Vendors of computer hardware and peripherals are not comparable to 
travel agents, real estate agents, advertising agents, conference 
organizers, and freight forwarders. Receipts from the sale of computer 
hardware substantially increase the size of a business. Those receipts 
can be used to replenish inventory, pay employees, reduce payables and 
debt, pay bonuses, and for other business purposes. They add to the 
business' asset base and net worth. However, travel agents and 
similarly operating businesses operate on a commission and/or fee 
basis. Their receipts are held in trust. The funds do not add to the 
business' asset base, and cannot be used to reduce payables or debt, or 
for any other business purposes. For sellers of computer hardware, the 
receipts constitute revenue. For travel agents and the like, although 
their total receipts may be high, most of their receipts do not 
constitute revenue.

Other Comments on the ITVAR Exception

    A few commenters noted that instead of focusing its efforts on 
eliminating the exception and on solving the non-existent problem, SBA 
should focus its effort toward preventing small business contracts from 
being diverted to large Fortune 500 companies and their subsidiaries.
    In response to SBA's justification to change size standards because 
of the comments that size standards have not kept up with changes to 
the economy, the commenter argued that those comments are false because 
there have been no changes to the percentage of U.S. firms that have 
less than 100 employees.
    One commenter also countered a comment from another commenter in 
support of the SBA's proposal that the removing the ITVAR exception 
will help level the playing field for companies looking for Federal 
opportunities by stating that the exception is allowing companies 
making hundreds of millions of dollars to bid as small businesses on 
ITVAR contracts, thereby blocking true small businesses from Federal 
opportunities. The commenter dismissed the supporting comment as a 
misleading and improper comparison between ITVARs and IT services 
providers for failing to account for the ITVAR's business and 
operational model. The commenter stressed that although ITVARs with 150 
or fewer employees have annual receipts substantially higher than $27.5 
million, they are truly small. The commenter argued that since, unlike 
general IT service providers, ITVARs also provide products with very 
thin profit margins, it would be unfair to compare them using the same 
revenue levels.

SBA's Response

    While SBA is committed to ensure that Federal government contracts 
set aside for small businesses only go to small businesses, not large 
businesses, the issue is beyond the scope of this rule. With respect to 
the comment regarding whether or not the size standards need to be 
adjusted, the U. S. Congress has required SBA to review all size 
standards and make necessary adjustments to reflect market conditions 
every five years (see Public Law 111-240, Section 1344). Although the 
percentage of firms below 100 employees has remained more or less 
constant over time, their market share in the economy has been 
shrinking. For example, the share of total sales/receipts of firms with 
less than 100 employees decreased from nearly 29 percent in 1997 to 
less than 26 percent in 2007 and those of larger firms has increased. 
The data would suggest bigger changes in many individual industries. 
The commenter's rebuttal of another comment in support of SBA's 
proposal also supports the Agency's current position that ITVARs should 
not be treated as an exception to the receipt based size standard that 
applies to IT services.

Comments on the Environmental Remediation Services Exception

    On September 15, 1994, SBA issued a final rule designating 
Environmental Remediation Services (ERS) an ``exception'' under 
Standard Industrial Classification (SIC) code 8744, Facilities Support 
Management Services, with a size standard of 500 employees (59 FR 
47236). Effective October 1, 2000, SBA adopted NAICS replacing the SIC 
system for its table of size standards (65 FR 30836). Currently, the 
500-employee size standard for ERS is an ``exception'' to the $20.5 
million receipts based size standard for NAICS code 562910, Remediation 
Services. The 500-employee size standard applies to Federal 
procurements that involve three or more services related to restoring a 
contaminated environment, such as

[[Page 4455]]

preliminary assessment, site inspection, testing, remedial 
investigation, remedial action, containment, and removal and storage of 
contaminated materials. The requirements that apply to the ERS 
exception and its 500-employee size standard for Federal procurement 
and SBA's financial assistance are in Footnote 14 to SBA's table of 
small business size standards (13 CFR 121.201).
    In the September 10, 2014 proposed rule, SBA proposed to increase 
the size standard for the ERS exception under NAICS code 562910 from 
500 employees to 1,250 employees. SBA sought public comments on its 
analyses of the industry and Federal market data and its justification 
for the proposal to increase the size standard for the ERS exception 
from 500 employees to 1,250 employees. SBA received 32 comments, 26 of 
which were from currently small businesses (i.e., with 500 or fewer 
employees) and six from other than small businesses (i.e., those with 
more than 500 employees). Commenters included women owned small 
businesses (WOSBs), current and former HUBZone and 8(a) businesses, 
service disabled veteran owned small businesses (SDVOSBs), and minority 
and Native American owned companies. As stated earlier, 23 commenters 
opposed SBA's proposal to increase the ERS size standard to 1,250 
employees and nine supported it. Three of the commenters opposing the 
proposed 1,250-employee size standard suggested a smaller increase to 
750 employees. One large business commenter supporting SBA's proposal 
suggested that SBA adopt a higher 1,500-employee size standard. These 
comments and SBA's responses are discussed below.

Comments Supporting SBA's Proposal To Increase the ERS Size Standard to 
1,250 Employees

    Commenters that supported the proposed increase of the ERS size 
standard to 1,250 employees reasoned that it would enable small 
businesses to grow beyond 500 employees. The commenters argued that the 
higher size standard would open doors to firms that have purposely 
remained under the 500-employee standard, and it would thereby spur 
business expansions and job creation. They noted that due to increased 
consolidation in the ERS industry there exists a large gap between 
firms below 500 employees and very large firms, thereby rendering 
smaller firms no longer able to compete for Federal opportunities on a 
full and open basis. The commenters argued that the higher size 
standard would close this gap between small and very large firms. They 
contended that the current size standard does not reflect the 
consolidated structure and current economic reality of the ERS industry 
and added that the proposed higher size standard represents a more 
accurate reflection of current market conditions in the ERS industry. 
Some commenters stated that since the size standard for ERS has not 
changed since 1994, the proposed increase would be a reasonable step 
toward matching current market conditions. With a disproportionately 
large amount of ERS work being set aside for small businesses with 
fewer than 500 employees, as some commenters maintained, the current 
size standard adversely affects larger businesses' ability to obtain 
work in the ERS market. They argued that the proposed higher size 
standard would help to establish balance and fairness in the Federal 
ERS market. Some stated that increasing the size standard would 
increase the number of set-aside contracts for small businesses and 
decrease the number of contracts under full and open competition.
    The commenters stated that the higher size standard would increase 
the number of small businesses and allow the government to increase the 
number and size of small business set-aside contracts. They stated that 
no individual firm at the 1,250-employee size standard would dominate 
the ERS industry and that the number of firms that would become small 
under the proposed higher size standard would be insignificant relative 
to total firms in the ERS industry. One commenter stated that the 
increased size standard would not affect 8(a) businesses, HUBZone 
businesses, SDVOSBs, or WOSBs. Some argued that the higher size 
standard would provide small businesses with more opportunities to 
compete for a larger share of the Federal ERS market.
    Some commenters noted that by increasing small business 
participation and job creation, the higher size standard would promote 
the Jobs Act initiative, while others stated that by increasing the 
pool of small businesses it would assist agencies to meet their small 
business contracting goals. Others argued that it would ensure that the 
government has an adequate pool of small businesses and it would 
increase competition in the small business ERS market and provide 
greater value for the dollars awarded to small businesses.
    Some commenters pointed out that firms under 500 employees lack the 
capacity to handle the increasing volume, complexity, and size of ERS 
contracts. They added that mid-size firms have the capacity and 
expertise to perform more complex and larger jobs, but cannot compete 
for those opportunities under the 500-employee size standard. With 
small businesses more than doubling their size under the proposed size 
standard, there would be a corresponding increase in small business 
capabilities, they argued. Another commenter stated that many agencies 
solicit work under performance based remediation contracts, under which 
the prime contractor assumes all risk. Current small businesses under 
the 500-employee size standard are not in a position, according to the 
commenter, to undertake these risks, but the increased size standard 
would allow small businesses to assume those risks. The commenter added 
that because of the requirements, ``small businesses often end up 
serving as pass through for work that is ultimately performed by large 
businesses.''
    One currently large company supporting SBA's proposal to increase 
the size standard believed that the size standard for ERS should be 
even higher at 1,500 employees. The commenter argued that its size is 
``disadvantaged'' vis a vis both ``mega'' firms and small businesses. 
With mergers and acquisitions driving up the average size of businesses 
in the industry, the definition of a small business should increase as 
well, the commenter concluded. Among the others supporting SBA's 
proposal, one suggested delaying the adoption of the revised size 
standard by 12 months to allow companies to plan and prepare to compete 
with larger companies. Another suggested adding nuclear remediation 
services to the ERS definition because remediation of nuclear materials 
is a significant part of Federal ERS contracts, while another 
recommended including regulatory compliance.

SBA's Response

    SBA is not adopting 1,500 employees as the size standard for ERS as 
suggested by one of the commenters for several reasons. First, besides 
consolidation in the ERS, the commenter did not provide specific data 
or analysis supporting the suggested 1,500-employee size standard. 
Second, the industry and Federal procurement data SBA analyzed in the 
proposed rule and in this final rule does not support a 1,500-employee 
size standard for ERS. Third, SBA is concerned that a 1,500-employee 
size standard would put many small ERS firms at a significant 
competitive disadvantage in competing for Federal opportunities. SBA 
does not agree with the suggestion from another commenter to delay the 
adoption of the revised size

[[Page 4456]]

standard for ERS by 12 months. The revised size standard that SBA 
adopts in the final rule becomes effective after 30 days from the date 
of publication of the final rule in the Federal Register. Delaying the 
effective date would hurt other businesses that would benefit from the 
timely adoption of a revised size standard. Some commenters suggested 
that nuclear remediation and regulatory compliance be included under 
the ERS definition. SBA believes that nuclear remediation is already 
covered under ``containment, remedial action, and removal and storage 
of contaminated materials'' of the current definition. Similarly, the 
term ``regulatory compliance'' is very broad to include under the ERS 
definition. Thus, SBA is not adopting these changes.

Comments Opposing SBA's Proposal To Increase the ERS Size Standard to 
1,250 Employees

    Commenters that were opposed to the proposed increase of the ERS 
size standard to 1,250 employees provided several reasons to support 
their positions. First, the commenters contended that the current ERS 
market is competitively fair under the 500-employee size standard, 
which was SBA's goal when it established the ERS exception and the 500-
employee size standard in 1994. They argued that there is no need for 
an increase to the size standard for ERS because agencies already have 
a sufficiently large and robust pool of highly qualified and 
experienced small businesses with the capacity, capability, and reach 
to meet their environmental remediation requirements. The commenters 
stated that this is proven by the successful performance of partial and 
total small business set-asides under various multiple award task order 
contracts (MATOCs) and single award task order contracts (SATOCs) under 
the ERS exception. They added that most ERS contracts rarely require 
resources of a company with more than 500 employees. Some stated that 
Federal clients are not adversely affected by the existing 500-employee 
size standard. The commenters noted that, during 2009-2013, 37-39 
percent of ERS dollar awards were made to small businesses, as compared 
to the Federal government's small business contracting goal of 23 
percent. They stated that it is rare that an agency receives less than 
a dozen bids on contracting opportunities set aside for small 
businesses. One commenter stated that the 500-employee size standard 
has worked well for all these years and it provides robust competition 
and significant cost savings to the government. The commenters also 
maintained that the majority of small businesses are below 250 
employees, suggesting that they have plenty of room to grow under the 
current size standard. Some explained that businesses with 500 or fewer 
employees represent 77 percent of total firms registered in the System 
for Award Management (SAM) under NAICS 562910. They added that up to 90 
percent of the industry would qualify as small under the proposed size 
standard.
    Second, the commenters argued that the environmental remediation 
services industry is in decline and that present and future 
requirements do not support the proposed increase to the ERS size 
standard. They alleged that SBA failed to consider this factor when 
proposing the increase. They stated that most sites identified in 
earlier decades have already been remediated or restored and fewer new 
sites are being designated. For example, as the commenters stated, of 
the more than 38,000 sites under DoD's restoration programs more than 
29,000 are now in monitoring status or complete. The commenters added 
that Federal government spending on ERS work is down 42 percent in the 
last five years, and the average sizes of ERS contracts have decreased 
as well. They argued that to raise the size standard for an industry 
that is declining runs counter to the reality of the market. One 
commenter argued that expansion of the size standard when the Federal 
market is declining would harm those firms that have dedicated 
resources to support the Federal government as small businesses.
    Third, a number of commenters expressed several concerns with SBA's 
analysis and the data it used in the proposed rule. The commenters 
contended that, by including very big and highly diversified firms for 
which ERS is not a major source of revenue, SBA's analysis inflated the 
average size, four-firm concentration and Gini coefficient of firms in 
this industry, and in turn inflated the size standard. Referring to the 
data on the top 200 environmental companies from Engineering News-
Record (http://enr.construction.com), several commenters argued that 
most of the large businesses receiving contracts under NAICS 562910 
have only a minor percentage of their employees participating in ERS 
work. Others argued that SBA evaluated all firms in NAICS 562910, 
instead of a subset of firms that are primarily engaged in the ERS 
activity. As a result, they argued, comparisons with anchor industry 
groups are unfair and not statistically valid. They recommended that 
SBA should either use the data on the number of employees associated 
with the ERS activity only or data on firms for which ERS is their 
primary industry. The Economic Census, SAM and FPDS-NG data do not 
depict an accurate picture of the ERS industry as they do not 
differentiate between small ERS firms and larger, more diverse firms, 
they added. One commenter noted that FPDS-NG may not capture the 
sufficient picture of the ERS industry, because it does not reflect 
subcontracting dollars. Some commenters suggested that SBA should use 
alternative data, such as market research and ``sources sought'' data 
from Department of Defense (DoD), Department of Energy (DoE), and 
Environmental Protection Agency (EPA).
    One commenter attributed the high Gini coefficient value to 
limiting the analysis to two PSCs that SBA used in defining ERS 
contracts and to including the contract awards data under the American 
Recovery and Reinvestment Act of 2009 (ARRA). The commenter noted that 
the two PSCs SBA selected represented only 38 percent of dollar awards 
during 2009-2011, while the government used 716 PSCs under NAICS 562910 
in 2009-2013. The commenter stated that 21 percent of contract dollars 
in ERS for 2009-2011 were awarded under ARRA, of which 24 percent were 
awarded to small businesses compared to 57 percent of non-ARRA awards. 
The commenter suggested excluding ARRA funds from the analysis and 
increasing the weight of the Federal contract factor five to ten times. 
In view of the sensitivity of the average firm size to size and number 
of firms, some commenters suggested using the median firm size instead 
of the average.
    Fourth, many commenters expressed concerns that the proposed 1,250-
employee size standard would allow more successful mid-sized and large 
businesses with significant financial capacity and resources to 
dominate the ERS small business market, thereby rendering the majority 
of businesses with fewer than 500 employees unable to compete for 
Federal opportunities. They added this would cause irreparable damage 
to existing and emerging small businesses that need SBA's support the 
most. They noted that this would be contrary to SBA's mission to aid, 
counsel, assist and protect small business interests. The higher size 
standard would mainly promote the interests of a very few larger, well-
established businesses above 500 employees at the expense of many small 
businesses under 500 employees, the commenters added. One commenter

[[Page 4457]]

argued that increasing the size standard would decrease small business 
participation because this would discourage small businesses from 
competing for small business contracts as the market would be crowded 
with significantly larger players. A few commenters maintained that 
small businesses are already faced with difficulty in competing against 
companies with 500 employees, and if the size standard is increased to 
1,250 employees they would go out of business. Some commenters noted 
that the higher size standard would not change the dominance of very 
large companies on unrestricted competitions, but, by increasing the 
number of small businesses, it would increase competition for set-
asides. Some believed that with a larger pool of small businesses under 
the higher size standard more contracts would be set aside with no 
subcontracting requirements, thereby reducing subcontracting 
opportunities for some small businesses. Small businesses, according to 
some commenters, are reluctant to bid on unrestricted contracts, 
because those contracts are usually too large to take on without a 
large business partner. Raising the size standard would allow large 
businesses to compete on their own without the need for small business 
partners, they argued.

SBA's Response

    With respect to commenters' concerns with including diversified 
firms in the analysis, SBA believes that, because by definition ERS 
procurements are composed of activities in three or more separate 
industries with separate NAICS codes, companies involved in ERS work 
are likely to be diversified. The FPDS-NG data depicts that companies 
receiving ERS contracts under NAICS 562910 have also received contracts 
under other NAICS codes. Accordingly, focusing on the data on firms 
that are primarily engaged in one of those activities may not provide 
an accurate and complete picture of the ERS sub-industry. Additionally, 
there really does not exist any data source for firms that are 
primarily engaged in ERS work. For example, as explained in the 
proposed rule, the Economic Census data for NAICS 562910 reflect all 
firms involved in remediation services, but not specifically those in 
the ERS sub-industry. Similarly, as the commenters have noted, SAM and 
FPDS-NG data also do not accurately reflect a company's primary 
industry. While many commenters expressed concerns with the Economic 
Census, SAM, and FPDS-NG data for evaluating the ERS sub-industry, the 
majority of them suggested no alternative data sources. A few suggested 
using the market research and sources sought data from Federal 
agencies. SBA is not aware that such data is stored or available, nor 
is it necessarily complete, since each contracting officer may conduct 
market research in a different way, and firms respond to sources sought 
notices in different ways, or sometimes not at all based on various 
factors.
    While SBA agrees with the commenters that the presence of large 
firms would affect the magnitude of industry factors and supported size 
standards, it disagrees with their argument that large firms should be 
excluded from the analysis if ERS is not their primary activity. Even 
if ERS is not their primary activity in terms of its contribution to 
their total revenue or employment, large firms can have significant 
competitive advantage in the market over their smaller counterparts. 
For example, a 10,000-employee company, even if only 2.5 percent of its 
workforce (or 250 employees) is engaged in the ERS activity, would have 
a significant competitive edge over a 500-employee company that only 
performs ERS work, due to its considerable resources and economies of 
scale. However, in response to the comments, in this final rule SBA has 
updated its analysis of industry and Federal contracting factors for 
the ERS sub-industry by using more recent data for fiscal years 2012-
2014 and by excluding the largest firms for which ERS work was not a 
significant source of their Federal revenues. This also addresses 
concerns from some commenters that the 2009-2011 data SBA used in the 
proposed rule were influenced by ARRA funds and the results in the 
proposed rule were not comparable to the Economic Census.
    SBA also disagrees with the commenters' suggestion that SBA should 
only consider the number of employees associated with the ERS activity 
when a company operates in multiple NAICS codes. For size standards 
purposes, SBA defines business size in terms of total employees or 
receipts for the overall company, not based on employees or receipts 
associated with individual NAICS codes. Additionally, none of the data 
sources SBA considers in its size standards analysis (such as Economic 
Census, SAM, and FPDS-NG) would provide employees or receipts broken 
down by NAICS code or type of work performed.
    The argument by some commenters that the SBA's analysis focused on 
all firms in NAICS 562910 is not correct. As explained in the proposed 
rule, SBA analyzed only about 700 firms receiving Federal contracts for 
environmental remediation services during fiscal years 2009-2011, as 
compared to more than 3,000 firms in NAICS 562910 from the 2007 
Economic Census, nearly 9,300 firms registered in SAM (as of March 
2015), and about 1,700-1,800 firms receiving Federal contracts during 
fiscal years 2012-2014 under that NAICS code. On the other hand, 
analyses from other commenters applied to total NAICS 562910, instead 
of the ERS sub-industry. For example, some noted that 77 percent of 
firms in NAICS 562910 are below 500 employees and that would increase 
to 90 percent if the size standard is increased to 1,250 employees. For 
the majority of industries, the current size standards cover 90-95 
percent of firms. Thus, even if the 1,250-employee size standard would 
include 90 percent firms within the ERS sub-industry, that would not be 
inconsistent with most other industries. One commenter argued that the 
two PSCs SBA used to identify the ERS contracts accounted for only 38 
percent of awards in NAICS 562910, but did not specify what other PSCs 
SBA should consider in identifying the ERS contracts. SBA agrees that 
there exist a large number of other PSCs associated with contracts 
under NAICS 562910, but it should be noted that they all do not apply 
to ERS contracts. The FPDS-NG data for fiscal years 2012-2014 show 432 
PSCs under NAICS 562910, significantly fewer than 716 PSCs suggested by 
the commenter. SBA selected the two PSCs based on its thorough review 
of contract awards data on FPDS-NG.
    In response to comments that the Federal ERS market has been in 
decline, SBA examined Federal contracting trends under NAICS 562910 for 
fiscal years 2001-2014 using the data from FPDS-NG. Total contract 
dollars for overall NAICS 562910 showed continuous growth from a little 
above $1.0 billion in 2001, peaking at a little over $7.0 billion in 
2009 in conjunction with the ARRA. Since then annual contract dollars 
for NAICS 562910 have remained at about the same level as that for 
several pre-ARRA years. Similarly, total dollar awards under the two 
PSCs (i.e., F108 and F999) that SBA used to identify ERS contracts also 
showed a similar trend. That is, total dollars under ERS contracts also 
showed continuous growth, increasing from nearly $0.64 billion in 2001 
to nearly $2.0 billion in 2009. ERS contract dollars declined during 
fiscal years 2010-2011, but bounced back averaging

[[Page 4458]]

a little over $2.0 billion during fiscal years 2012-2014. Although the 
growth in Federal ERS market has slowed and seen some ups and downs in 
recent years, these trends do not necessarily support the argument that 
the ERS industry is shrinking.

Comments Supporting SBA's Proposed Size Standards in General

    An association representing small business investment companies 
(SBICs) applauded SBA's effort to review and increase size standards 
for the 30 industries covered by the proposed rule. The association 
also supported SBA's approach to maintaining the current size standards 
for 24 industries. Specifically, it supported the proposed increases to 
size standards in the Mining, Freight Transportation and Publishing and 
Technology Sectors because SBICs have substantial investments in those 
sectors. The association noted that proposed size standards increases 
will expand investment opportunities for SBICs and promote job creation 
and suggested that SBA should review and update size standards on a 
regular basis.

Comments Opposing SBA's Proposed Size Standards in General

    One commenter opposed SBA's proposed increases to size standards. 
The commenter argued that instead of focusing on the 98 percent of 
businesses that are truly small businesses, SBA is focusing on the 2 
percent of the largest corporations and classifying them as small 
businesses so that they can take business and loans away from truly 
small businesses. The commenter added that SBA's small business 
definitions are much larger than those used by other countries (such as 
Australia and European Union) and by the U.S Congress, for example, for 
the Affordable Health Care Act. The commenter further stated that since 
2008, SBA, by expanding small business definitions, has allowed more 
than 74,000 larger corporations to be classified as small. The 
commenter claimed that the average size of SBA's loan increased from 
$185,000 in 2008 to $534,000 in 2013, while the share of loans under 
$100,000, which the commenter claimed generally go to truly small 
businesses, decreased from 24 percent to 9 percent. The commenter used 
these statistics to conclude that the expansion of small business size 
definitions has excluded truly small businesses from SBA's loans 
programs. Lastly, the commenter claimed that large corporations that 
qualify as small under the expanded definition of small businesses will 
take away government contracts from truly small businesses that SBA is 
supposed to be supporting.

SBA's Response

    SBA acknowledges that some of its proposed size standards could 
include as much as 97 percent to 99 percent of firms in a given 
industry. However, it is very important to point out that while it may 
appear to be a large segment of an industry in terms of the percentage 
of firms, small firms in those industries represent only about a third 
of total industry receipts.
    What constitutes a small business in other countries does not apply 
and has no relevance to SBA's small business definitions and U.S. 
Government programs that use them. Depending on their economic and 
political realities, other countries have their own programs and 
priorities that can be very different from those in the U.S. 
Accordingly, small business definitions other countries use for their 
government programs can be vastly different from those established by 
SBA for U.S. Government programs. From time to time, the U.S. Congress 
has used different thresholds, sometimes below the SBA's thresholds, to 
define small firms under certain laws or programs, but those thresholds 
apply only to those laws and programs and generally are of no relevance 
to SBA's size standards. SBA establishes size standards, in accordance 
with the Small Business Act, for purposes of establishing eligibility 
for Federal small business procurement and financial assistance 
programs. The primary statutory definition of a small business is that 
the firm is not dominant in its field of operation. Accordingly, rather 
than representing the smallest size within an industry, SBA's size 
standards generally designate the largest size that a business concern 
can be relative to other businesses in the industry and still qualify 
as small for Federal government programs that provide benefits to small 
businesses.
    The commenter's figures on average loan size for 2008 and 2013 are 
not correct. Based on numbers and amounts of loans issued under SBA's 
7(a) and CDC/504 loan programs, the average loan size increased from 
about $230,500 in 2008 to about $426,900 in 2013, rather than from 
$185,000 to $534,000 as claimed by the commenter.
    SBA does not agree that increases in average loan amounts and 
decreases in smaller loans are solely due to the increases in size 
standards for two reasons. First, with the passage of the Jobs Act in 
2010, Congress increased the limits for SBA's 7(a) loans from $2 
million to $5 million, for CDC/504 loans from $1.5 million to $5.5 
million, and for SBA Express loans made during the one year period 
following the Jobs Act from $350,000 to $1 million. Second, at the same 
time, Congress also increased the tangible net worth and net income 
limits of the alternative size standard from $8.5 million and $3 
million to $15 million and $5 million, respectively. Under the 
alternative size standard, businesses that are above their industry 
size standards can qualify for SBA's loans. These statutory changes are 
important factors behind the increase in the average size of an SBA 
loan. However, such changes do not necessarily mean that truly small 
businesses are getting fewer loans now than in 2008. In fact, 
businesses with less than 10 employees received a total of $12.1 
billion in loans through SBA's 7(a) and 504 programs in 2014, as 
compared to $10.6 billion in 2008. That was an increase of more than 14 
percent.
    With respect to the claim that large corporations that qualify as 
small under the expanded definition of small businesses will take away 
government contracts from truly small businesses, the commenter did not 
provide any supporting data.

Analyses and Conclusions

ITVAR Industry Analysis

    In the 2003 final rule, SBA used a hybrid approach to create and 
evaluate the ITVAR exception. Specifically, based on the assumption 
that ITVARs operate in NAICS Industry Group 5415 (Computer System 
Design and Related Services) and in NAICS 423430 (Computer and Computer 
Peripheral Equipment and Software Merchant Wholesalers), SBA used the 
1997 Economic Census data and combined part of NAICS Industry Group 
5415 with part of NAICS 423430 and defined the result as the ITVAR 
industry and used it as the basis to establish the characteristics of 
ITVAR firms. As discussed elsewhere in this final rule, SBA now finds 
several problems with that approach. First, there is no need to create 
the ITVAR industry in that manner because, based on their primary 
activity of selling computer hardware and software, ITVARs are included 
in NAICS 423430. Accordingly, SBA now believes the industry data for 
NAICS 423430 alone would provide a more accurate description of ITVAR 
firms than the hybrid approach, especially given significant 
differences in economic structure between firms in NAICS Industry Group 
5415 and ITVAR firms, as suggested by the Economic Census data and also 
confirmed by

[[Page 4459]]

many commenters. Second, in combining the two industry categories, the 
sale of computer hardware and software segment of NAICS 423430 was 
excluded even if that segment accounted for more than 80 percent of 
total receipts of that industry. Many commenters also argued that the 
sales of computer hardware and software account for the majority of 
receipts of ITVAR firms. SBA has determined that had the computer 
hardware and software segment been included, the analysis would have 
supported the same 500-employee nonmanufacturer size standard for ITVAR 
firms as well. Third, by construction, the ITVAR exception applies to 
procurements that are predominantly supply contracts, yet the 2003 
final rule included it as an exception to NAICS 541519, which is a 
services NAICS code. For these reasons, in this final rule, SBA is not 
adopting the 2003 hybrid approach although some commenters suggested 
using the same approach to evaluate the ITVAR exception and its 150-
employee size standard.
    SBA's analysis in this final rule is based on the premise that 
ITVARs are basically wholesalers and supply computer hardware and 
software as nonmanufacturers and that all firms in Wholesale Trade 
(NAICS Sector 42) share the same 500-employee size standard for 
purposes of Federal procurement of supplies under the NMR. Thus, any 
size standard exception to the ITVARs, if warranted, should be 
addressed within the context of the NMR.
    In response to the comments and reevaluation of all available 
industry and Federal procurement data relating to the ITVAR exception, 
SBA analyzed economic characteristics of ITVAR firms and their size 
standard using two data sources. The first is the 2007 Economic Census 
data (the latest available) for NAICS Sector 42, including NAICS 
423430. Second is the FPDS-NG and small business goaling data on firms 
receiving contracts under the ITVAR exception to NAICS 541519 during 
fiscal years 2012-2014. SBA also looked at the data from USASpending 
(www.usaspending.gov), but business size information of some 
contractors was found to be outdated. Therefore, for Federal 
procurement data SBA relied on FPDS-NG and small business goaling data, 
and relied on SAM for business size data.
    As stated in the proposed rule, the Economic Census industry data 
are limited to the 6-digit NAICS codes and do not provide economic 
characteristics for the exception. As explained above and also noted in 
the 2003 final rule, based on their primary activity, ITVARs are 
classified under NAICS 423430 in Wholesale Trade Sector (NAICS Sector 
42). Given that ITVARs are part of one of the industries in Wholesale 
Trade and that the current size standard for Federal procurement of 
supplies for all firms in the Wholesale Trade sector is 500 employees 
under the NMR, SBA believes it is pertinent to examine the 
characteristics of ITVAR firms relative to those for other industries 
in the sector to determine if a different size standard is appropriate 
for ITVAR firms. For this, using the 2007 Economic Census data, SBA 
ranked all industries in NAICS Sector 42 based on each industry factor 
and placed them in one of the five ranked quintiles (i.e., less than 
the 20th percentile, the 20th to less than the 40th percentile, the 
40th to less than the 60th percentile, the 60th to less than the 80th 
percentile, and the 80th or higher percentile). The quintile ranges of 
values for each industry factor are shown in Table 1, ``Values of 
Industry Factors for NAICS Sector 42 by Quintile.'' The second row from 
the bottom shows the values for firms in NAICS 423430, while values for 
industry factors for NAICS 541519 are in the last row for comparison.

                                                               Table 1--Values of Industry Factors for NAICS Sector 42 by Quintile
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          Weighted average firm
            Quintile                   Percentile  (%)        Simple average firm size       size  (number of         Average assets size     Average number employees      Gini coefficient
                                                               (number of  employees)           employees)                 ($million)           of largest four firms
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1st quintile....................  <20%.....................  <13.5....................  <78.0....................  <2.8.....................  <700.0..................  <0.680
2nd quintile....................  20% to <40%..............  13.5 to <17.0............  78.0 to <141.0...........  2.8 to <4.5..............  700.0 to <1,096.3.......  0.680 to <0.731
3rd quintile....................  40% to <60%..............  17.0 to <20.8............  141.0 to <202.8..........  4.5 to <6.5..............  1,096.3 to <1,648.8.....  0.731 to <0.786
4th quintile....................  60% to <80%..............  20.8 to <26.0............  202.8 to <448.9..........  6.5 to <8.8..............  1,648.8 to <4,034.3.....  0.786 to <0.844
5th quintile....................  >=80%....................  >=26.0...................  >=448.9..................  >=8.8....................  >=4,034.3...............  >=0.844
------------------------------------------------------------
NAICS Sector 42 (total)....................................  18.7.....................  606......................  5.4......................  7,562...................  0.814
NAICS 423430...............................................  36.0.....................  1,249....................  8.8......................  25,321..................  0.891
NAICS 541519...............................................  10.2.....................  283......................  0.6......................  3,860...................  0.756
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    As can be seen from the above table, NAICS 423430 falls in the 
fifth or highest quintile for all industry factors. This means that for 
all factors NAICS 423430 ranked above more than 80 percent of the 
industries in Sector 42. Thus, the data do not support a lower size 
standard for firms in NAICS 423430 than for other industries in the 
sector. In other words, the current 150-employee size standard for 
ITVARs is inconsistent with their characteristics as compared to the 
characteristics of firms in other wholesale trade industries for which 
the size standard for Federal procurement is 500 employees. In the 
proposed rule, published on May 19, 2014 (79 FR 28631), SBA proposed 
retaining the current 500-employee size standard for procurement of 
supplies under the NMR. Additionally, the results also depict that 
firms in NAICS 423430 differ from those in NAICS 541519.
    To determine characteristics of ITVAR firms and the impact of SBA's 
proposal, many commenters recommended that SBA evaluate the data on 
employees and receipts of firms receiving contracts under various GWACs 
(e.g., DHS's FirstSource I/II, Air Force's NETCENTS-2, Army's ITES-3H, 
NASA's SEWP IV/V, and NIH's CIO-CS) which, according to the commenters, 
have used the ITVAR exception and 150-employee size standard. However, 
the review of the FPDS-NG data showed that, of various GWACs suggested 
by the commenters, only DHS's FirstSource I/II and NASA's SEWP IV/V 
used the ITVAR exception and 150-employee size standard. Among others, 
no awards have been made yet under NIH's CIO-CS and Army's ITES-3H. 
Their predecessor programs used

[[Page 4460]]

manufacturing NAICS codes. Specifically, NIH's ECS-3 used NAICS 334111, 
while Army's ITES-2H mostly used NAICS 334111, 334112 and 334119. Air 
Force's NETCENTS-2 used NAICS 334210. Additionally, based on review of 
FPDS-NG data and various GSA supply schedules, SBA found that agencies 
have also procured new computer and networking hardware through GSA's 
Schedule 70 SIN 132-8 using NAICS 541519.
    SBA examines the data from SAM, small business goaling statistics 
and FPDS-NG to evaluate all exceptions and industries that are not 
covered by the Economic Census. Accordingly, using the FPDS-NG and 
small business goaling data, SBA identified 259 unique firms that 
received contracts under DHS's FirstSource I and II, NASA's SEWP IV and 
V, and GSA's Schedule 70 SIN 132-8 using the ITVAR exception to NAICS 
541519 during fiscal years 2012-2014. By program, 37 firms received 
contracts under FirstSource I and II, 174 firms under SEWP IV and V, 
and 111 firms under Schedule 70. These figures add up to more than 259 
firms because some firms received contracts under more than one 
program. SBA obtained latest information on average annual receipts and 
number of employees of those firms from their SAM profiles. Of those 
259 unique firms, SBA excluded some very large manufacturing firms for 
which the ITVAR activity was not a major source of their Federal 
revenues, as well as others with missing or questionable employee and 
revenue information, yielding a total of 231 firms. This group of firms 
still contained quite large firms for which the ITVAR activity did not 
appear to be a major source of their Federal revenues. To prevent such 
large firms from skewing the results and obtain a more representative 
group of ITVAR firms, SBA further excluded 7.5 percent of the largest 
firms based on number of employees and another 5 percent of the largest 
firms based on revenue, resulting in a total of 204 firms. SBA analyzed 
the employee and revenue data on these firms to establish industry 
characteristics of ITVAR firms in terms of average size, industry 
concentration, and distribution by size. Firms that received contracts 
under NASA's SEWP V did not yet have dollars awarded to them. Thus, SBA 
excluded those firms when calculating the Federal contracting factor 
(i.e., the difference between small business share of total industry 
receipts and the similar share of total contracts dollars). SBA derived 
the size standard for each factor using the methodology for employee 
based size standards that the Agency used in the proposed rule. These 
results along with supported size standards by each of those factors 
are provided in Table 2 ``Size Standards Supported by Each Factor for 
Firms Receiving ITVAR Contracts (No. of Employees),'' below. As shown 
in the table, the results support a 500-employee size standard for 
ITVAR firms.
    Many commenters expressed concerns about having to compete with 
larger ITVARs if the ITVAR exception is eliminated and ITVAR contracts 
are reclassified under the manufacturing NAICS codes, thereby 
subjecting them to the 500-employee nonmanufacturer size standard. To 
validate these concerns, SBA analyzed characteristics of firms 
receiving computer hardware and software contracts under NIH's ECS-3, 
NASA's SEWP IV, Army's ITES-2H, and GSA's Schedule 70 SIN 132-8 that 
used the manufacturing codes under Industry Group 3411 (Computer and 
Peripheral Equipment Manufacturing), NAICS 423430 (Computer and 
Computer Peripheral Equipment and Software Merchant Wholesalers), or 
NAICS 443142/443120 (Electronic Stores (NAICS 2012)/Computer and 
Software Stores (NAICS 2007)).

                                                      Table 2--Size Standards Supported by Each Factor for Firms Receiving ITVAR Contracts
                                                                                      [Number of employees]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                (1)                                      (2)           (3)           (4)           (5)           (6)           (7)           (8)           (9)          (10)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       Simple       Weighted                                                                           Calculated
                                                                       average       average       Average                    Four-firm                    Federal        size      Current size
                      NAICS Code/GWAC Program                         firm size     firm size    assets size    Four-firm   average size      Gini        contract      standard      standard
                                                                     (number of    (number of    ($million)    ratio  (%)     (number of   coefficient   factor  (%)   (number of    (number of
                                                                     employees)    employees)                               employees) *                               employees)    employees)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
ITVAR Exception, 541519...........................................            63           298          $9.5          11.3            NA         0.359          23.0           500           150
NASA SEWP IV and V, DHS First Source I and 2, and GSA Schedule 70            500           500           500  ............  ............           500           150  ............  ............
 SIN 132 8........................................................
3341, 423430 and 443142/443120....................................            57           438          $7.1          11.3            NA         0.519           3.2           500           500
NASA SEWP IV, NIH ECS-3, ARMY ITES-2H, and GSA Schedule 70 SIN 132-          500           750           500  ............  ............           500           500  ............  ............
 8................................................................
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Size standard for four-firm average size is not calculated as the four-firm ratio is less than 40%.

    Using the FPDS-NG and small business goaling data, SBA identified 
446 unique firms that received contracts during fiscal years 2012-2014 
through those programs using NAICS Industry Group 3411, NAICS 423430, 
and NAICS 443142/443120. After the exclusion of manufacturing firms and 
very large firms for which the sales of computer hardware and software 
was not a major source of their Federal revenue, as well as others with 
missing or questionable employee and revenue information, there 
remained 421 firms. This group of firms still included some large firms 
for which computer hardware and software contracts did not appear to be 
a principal source of their Federal sales. To prevent such large firms 
from biasing the results, SBA further removed 7.5 percent of the 
remaining largest firms based on the number of employees and another 5 
percent based on revenue, yielding a total of 371 firms. Using these 
firms, SBA derived industry factors (e.g., average size, average 
assets, industry concentration, and the Gini coefficient) and Federal 
contracting factor and supported size standards using the ``SBA's Size 
Standards Methodology'' (available at www.sba.gov/size) used in the 
proposed rule. These results are also shown in

[[Page 4461]]

Table 2, ``Size Standards Supported by Each Factor for Firms Receiving 
ITVAR Contracts (No. of Employees), above. The results on individual 
factors and size standards supported by them do not seem to suggest 
that firms receiving computer hardware and software contracts under the 
manufacturing NAICS codes are larger than those receiving similar 
contracts under the ITVAR exception to NAICS 541519. The data from both 
groups of firms support the same 500-employee size standard for ITVARs.
    Thus, based on the characteristics of firms in NAICS 423430 
relative to those for all firms in NAICS Sector 42 and data on firms 
receiving computer hardware and software contracts both under the ITVAR 
exception and manufacturing NAICS codes, the data suggests that the 
size standard for ITVAR firms should be the same as the 500-employee 
nonmanufacturer size standard. However, in view of concerns from most 
commenters that with the elimination of the ITVAR exception small 
ITVARs with fewer than 150 employees would be forced to compete for 
Federal opportunities with large companies up to 500 employees under 
the 500-employee nonmanufacturer size standard, SBA has decided to 
leave the exception under NAICS 541519 with the 150-employee size 
standard.
    As discussed elsewhere in this final rule SBA has determined that 
there is no legal basis to exclude ITVAR contracts, which by definition 
are primarily supply contracts, from the manufacturing performance 
requirements or the NMR. Accordingly, in this final rule, SBA has 
amended Footnote 18 by adding the requirement that the offeror on small 
business set-aside ITVAR contracts must comply with the manufacturing 
performance requirements or the NMR. That means products being supplied 
must be of a small business manufacturer made in the U.S., unless no 
small business manufacturers exist. If an agency determines that no 
small businesses manufacturers can be expected to meet requirements 
under a particular solicitation, they can request a waiver of the NMR, 
as discussed in more detail at 13 CFR 121.406 and 121.1204. This would 
eliminate the current confusion on the applicability of the 
manufacturing performance requirements or the NMR to the ITVAR 
contracts. This would also eliminate inconsistency in the current 
regulations that exempt the ITVAR contracts from the manufacturing 
performance requirements or the NMR, even if by definition they are 
primarily supply contracts.
    The current definition of the ITVAR exception in Footnote 18 also 
provides for eligibility of ITVARs for SBA's financial assistance. For 
firms in NAICS Sectors 42 and 44-45, the applicable size standard for 
SBA's financial assistance is the size standard for their primary 
industry. Accordingly, for SBA's financial assistance, ITVARs will 
qualify under the industry-specific size standard for NAICS 423430, 
which SBA recently increased from 100 employees to 250 employees. 
Because this size standard is higher than the 150-employee ITVAR size 
standard and ITVARs that exceed the 150-employee size standard can 
still qualify for financial assistance under the tangible net worth and 
net income based alternative size standard, SBA does not see the need 
to include the eligibility requirement for SBA's financial assistance 
under the ITVAR exception. SBA's amendments to Footnote 18 to SBA's 
table of size standards also reflect this change.
    Given the above amendment to Footnote 18 to the table of size 
standards that the offeror on small business set-aside ITVAR contracts 
must comply with the manufacturing performance requirements or the NMR, 
SBA is also amending paragraph b(3) under 13 CFR 121.406 to provide 
that the NMR also applies to procurements that have been assigned the 
Information Technology Value Added Resellers (ITVAR) exception to NAICS 
code 541519. Similarly, SBA is also amending paragraph b(4) under 13 
CFR 121.406 to provide that the NMR also applies to the supply 
component of a requirement classified as an ITVAR contract.
    Finally, SBA is also amending introductory text in paragraph b(5) 
under 13 CFR 121.406 to correct a typo in paragraph citation from 
paragraph b(1)(iii) to paragraph b(1)(iv).

ERS Industry Analysis

    In response to the comments, SBA reevaluated the methodology and 
data sources it used in the proposed rule. Specifically, in this final 
rule, SBA has analyzed the data on firms receiving ERS contracts during 
fiscal years 2012-2014 and the 2014 top 200 environmental firms from 
Engineering News-Record (ENR) (http://enr.construction.com/toplists/) 
that some commenters provided. The review of the 2012-2014 Federal 
contracting data confirms that the two PSC codes SBA used in the 
proposed rule to identify ERS contracts were correct. SBA believes that 
this more recent data not only provides a better reflection of the ERS 
market conditions, but also addresses the commenters' concerns for 
including ARRA funds in the 2009-2011 data used in the proposed rule. 
Additionally, in computing the industry and Federal contracting 
factors, SBA excluded the largest environmental firms for which ERS 
contracts did not appear to be a major source of their total revenues.
    Using the FPDS-NG and small business goaling data, SBA identified 
921 unique firms that received ERS contracts during fiscal years 2012-
2014. With the exclusion of known non-environmental firms and those 
with missing or questionable employee and revenue information, there 
remained 882 firms. To prevent very large, diversified firms from 
biasing the results, SBA further excluded 5 percent of the largest 
firms for which ERS activity did not generally appear to be a principal 
source of their total sales. Additionally, using the information on the 
top 200 environmental firms from ENR that the commenters provided, SBA 
excluded five more very large firms for which environmental work 
(including both Federal and non-Federal) accounted for less than 25 
percent of their total revenues. This yielded a total of 833 firms. SBA 
analyzed the employment and revenue data on these firms to obtain 
industry factors (e.g., average size, industry concentration, and the 
Gini coefficient) and the Federal contracting factor and supported size 
standards using the SBA's size standards methodology used in the 
proposed rule. As in the proposed rule, SBA is unable to compute the 
average assets due to the lack of data. The results of this analysis 
are provided in Table 3, ``Size Standards Supported by Each Factor for 
the ERS Sub-industry (No. of Employees),'' below.

[[Page 4462]]



                                                            Table 3--Size Standards Supported by Each Factor for the ERS Sub-Industry
                                                                                      [Number of employees]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Simple         Weighted                                        Four-firm                                      Calculated
                                                                   average firm    average firm       Average        Four-firm     average size        Gini           Federal      size standard
                                                                   size  (number   size  (number    assets size      ratio (%)      (number of      coefficient      contract       (number of
                                                                   of employees)   of employees)    ($ million)                    employees) *                     factor  (%)     employees)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Factor..........................................................              89             492              NA            38.5              NA           0.749            10.1             750
Size standard...................................................             750           1,000              NA  ..............              NA             500             500  ..............
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Size standard for four-firm average size is not calculated as the four-firm ratio is less than 40%.

    Thus, based on the results above, in this final rule, SBA is 
adopting 750 employees as the size standard for the ERS exception under 
NAICS 562910. Based on FPDS-NG and SAM data, about 10-15 additional 
firms will gain small business status under the new 750-employee size 
standard for ERS. SBA believes that this will not have a significant 
impact on small businesses below the current 500-employee size 
standard.

Exceptions Under NAICS 541712, Research and Development in the 
Physical, Engineering, and Life Sciences (Except Biotechnology)

    NAICS 541712, Research and Development in the Physical, 
Engineering, and Life Sciences (except Biotechnology), has three sub-
industries or ``exceptions.'' As stated in Footnote 11 to SBA's table 
of size standards, for research and development (R&D) contracts 
requiring the delivery of a manufactured product, the appropriate size 
standard is that of the corresponding manufacturing industry. To better 
match the exceptions under NAICS 541712 to the corresponding proposed 
industry specific size standards in manufacturing, SBA proposed to 
modify the titles of the three exceptions. The Other Guided Missile and 
Space Vehicle Parts and Auxiliary Equipment category was dropped from 
the third exception because the proposed size standard for the 
corresponding manufacturing industry (NAICS 336419) was the same as the 
proposed size standard for rest of NAICS 541712. In the absence of 
adverse comments, SBA is adopting the modified exceptions as shown in 
Table 4, ``Modified Exceptions to NAICS 541712 and Their Revised Size 
Standards,'' as proposed.

                  Table 4--Modified Exceptions to NAICS 541712 and Their Revised Size Standards
----------------------------------------------------------------------------------------------------------------
                            Current                                                 Proposed
----------------------------------------------------------------------------------------------------------------
                                                 Size standard                                     Size standard
                   Exception                      (number of                Exception               (number of
                                                  employees)                                        employees)
----------------------------------------------------------------------------------------------------------------
Aircraft......................................           1,500  Aircraft, Aircraft Engine, and             1,500
                                                                 Engine Parts.
Aircraft Parts and Auxiliary Equipment, and              1,000  Other Aircraft Parts and                   1,250
 Aircraft Engine Parts.                                          Auxiliary Equipment.
Space Vehicles and Guided Missiles, Their                1,000  Guided Missiles and Space                  1,250
 Propulsion Units Parts, and Their Auxiliary                     Vehicles, Their Propulsion
 Equipment and Parts.                                            Units and Propulsion Parts.
----------------------------------------------------------------------------------------------------------------

    Additionally, to eliminate possible confusion and provide more 
clarity, SBA also proposed to amend Footnote 11 by converting the 
introductory paragraph to a new sub-paragraph (b) and renaming existing 
sub-paragraphs (b) and (c) to sub-paragraphs (c) and (d), respectively. 
SBA is adopting the proposed amendments to Footnote 11 to BA's table of 
size standards.

Offshore Marine Air Transportation Services and Offshore Marine 
Services

    Offshore Marine Air Transportation Services is a sub-industry or 
``exception'' under both NAICS 481211, Nonscheduled Chartered Passenger 
Air Transportation, and NAICS 481212, Nonscheduled Chartered Freight 
Air Transportation. The size standards are 1,500 employees for both 
NAICS codes 481211 and 481212 and $30.5 million in average annual 
receipts for the exception. Similarly, as indicated in Footnote 15 to 
SBA's table of size standards, Offshore Marine Services is an exception 
to all industries under NAICS Subsector 483, Water Transportation, with 
the size standard of $30.5 million in average annual receipts. All 
industries within Subsector 483 currently have a 500-employee size 
standard. SBA did not review the receipts based exceptions when it 
reviewed receipts based size standards in NAICS Sector 48-49, 
Transportation and Warehousing. For the reasons provided in the 
proposed rule, SBA proposed to eliminate both exceptions and their 
$30.5 million receipts based size standard and only apply the 
applicable employee based size standard. As a result, SBA also proposed 
to eliminate Footnote 15 from SBA's table of size standards. Since 
there were no comments against the proposed change, SBA is eliminating 
both exceptions and their receipts based size standard, as proposed. 
This will not affect the eligibility of firms that are small under the 
$30.5 million receipts based size standard because they will continue 
to be eligible under the employee based size standard.

Conclusions

    Based on SBA's analyses of the latest available industry and 
Federal market data and its evaluation of public comments on the 
proposed rule, in this final rule, SBA is adopting all proposed 
changes, with two exceptions. SBA is not adopting its proposed 
elimination of the ITVAR exception to NAICS 541519 or its proposed 
increase to the size standard for ERS exception to NAICS 562910 from 
500 employees to 1,250 employees.
    With regard to the ITVAR exception to NAICS 541519, in response to 
the comments, SBA retains the ITVAR

[[Page 4463]]

exception to NAICS 541519 with the 150-employee size standard. However, 
SBA amends Footnote 18 to SBA's table of size standards by adding the 
requirement that the supply (i.e., computer hardware and software) 
component of small business set-aside ITVAR contracts must comply with 
the manufacturing performance requirements, or comply with the NMR by 
supplying the products of small business concerns, unless SBA has 
issued a class or contract specific waiver of the NMR. With regard to 
the ERS exception under NAICS 562910, based on its analysis of more 
recent data and evaluation of public comments, in this final rule, SBA 
increases the size standard for the ERS exception from 500 employees to 
750 employees, instead of the proposed 1,250 employees. All revisions 
adopted in this final rule are shown in Table 5, ``Summary of Adopted 
Size Standards Revisions,'' below.

                              Table 5--Summary of Adopted Size Standards Revisions
----------------------------------------------------------------------------------------------------------------
                                                                   Current size    Current size    Adopted size
                                                                     standard        standard        standard
           NAICS code                  NAICS industry title        (millions of     (number of      (number of
                                                                     dollars)       employees)      employees)
----------------------------------------------------------------------------------------------------------------
211111..........................  Crude Petroleum and Natural     ..............             500           1,250
                                   Gas Extraction.
211112..........................  Natural Gas Liquid Extraction.  ..............             500             750
212111..........................  Bituminous Coal and Lignite     ..............             500           1,250
                                   Surface Mining.
212112..........................  Bituminous Coal Underground     ..............             500           1,500
                                   Mining.
212113..........................  Anthracite Mining.............  ..............             500             250
212210..........................  Iron Ore Mining...............  ..............             500             750
212221..........................  Gold Ore Mining...............  ..............             500           1,500
212222..........................  Silver Ore Mining.............  ..............             500             250
212231..........................  Lead Ore and Zinc Ore Mining..  ..............             500             750
212234..........................  Copper Ore and Nickel Ore       ..............             500           1,500
                                   Mining.
212291..........................  Uranium-Radium-Vanadium Ore     ..............             500             250
                                   Mining.
212299..........................  All Other Metal Ore Mining....  ..............             500             750
212312..........................  Crushed and Broken Limestone    ..............             500             750
                                   Mining and Quarrying.
212313..........................  Crushed and Broken Granite      ..............             500             750
                                   Mining and Quarrying.
212324..........................  Kaolin and Ball Clay Mining...  ..............             500             750
212391..........................  Potash, Soda, and Borate        ..............             500             750
                                   Mineral Mining.
212392..........................  Phosphate Rock Mining.........  ..............             500           1,000
213111..........................  Drilling Oil and Gas Wells....  ..............             500           1,000
221210..........................  Natural Gas Distribution......  ..............             500           1,000
481211..........................  Offshore Marine Air                      $30.5  ..............       Eliminate
Except,.........................   Transportation Services.
481212..........................  Offshore Marine Air                       30.5  ..............       Eliminate
Except,.........................   Transportation Services.
482112..........................  Short Line Railroads..........  ..............             500           1,500
483112..........................  Deep Sea Passenger              ..............             500           1,500
                                   Transportation.
483113..........................  Coastal and Great Lakes         ..............             500             750
                                   Freight Transportation.
483211..........................  Inland Water Freight            ..............             500             750
                                   Transportation.
511110..........................  Newspaper Publishers..........  ..............             500           1,000
511120..........................  Periodical Publishers.........  ..............             500           1,000
511130..........................  Book Publishers...............  ..............             500           1,000
511140..........................  Directory and Mailing List      ..............             500           1,250
                                   Publishers.
511191..........................  Greeting Card Publishers......  ..............             500           1,500
512220..........................  Integrated Record Production/   ..............             750           1,250
                                   Distribution.
512230..........................  Music Publishers..............  ..............             500             750
519130..........................  Internet Publishing and         ..............             500           1,000
                                   Broadcasting and Web Search
                                   Portals.
541711..........................  Research and Development in     ..............             500           1,000
                                   Biotechnology\11\.
541712..........................  Research and Development in     ..............             500           1,000
                                   the Physical, Engineering,
                                   and Life Sciences (except
                                   Biotechnology)\11\.
Except,.........................  Aircraft Engine and Engine      ..............           1,000           1,500
                                   Parts.
Except,.........................  Other Aircraft Parts and        ..............           1,000           1,250
                                   Auxiliary Equipment.
Except,.........................  Guided Missiles and Space       ..............           1,000           1,250
                                   Vehicles, Their Propulsion
                                   Units and Propulsion Parts.
562910..........................  Environmental Remediation       ..............             500             750
Except,.........................   Services.
----------------------------------------------------------------------------------------------------------------

Evaluation of Dominance in Field of Operation

    SBA has determined that for the industries for which it is revising 
size standards in this final rule, no individual firm at or below the 
revised size standard will dominate its field of operation. Among the 
industries for which the size standards are revised in this rule, the 
small business share of total industry receipts is, on average, 3.4 
percent, with an interval showing a minimum of less than 0.01 percent 
to a maximum of 20.0 percent. These market shares effectively preclude 
a firm at or below the proposed size standards from exerting control 
over any of the industries.

Compliance With Executive Orders 12866, 13563, 12988 and 13132, the 
Paperwork Reduction Act (44 U.S.C. Ch. 35) and the Regulatory 
Flexibility Act (5 U.S.C. 601-612). Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
final rule is a significant regulatory action for purposes of Executive 
Order 12866. Accordingly, in the next section, SBA

[[Page 4464]]

provides a Regulatory Impact Analysis of this rule. However, this rule 
is not a ``major rule'' under the Congressional Review Act, 5 U.S.C. 
800.

Regulatory Impact Analysis

1. Is there a need for the regulatory action?
    SBA believes that the size standards adopted in this rule better 
reflect the economic characteristics of small businesses in the 
affected industries and the Federal government marketplace. SBA's 
mission is to aid and assist small businesses through a variety of 
financial, procurement, business development, and advocacy programs. To 
determine the intended beneficiaries of these programs, SBA establishes 
distinct definitions of which businesses are deemed small businesses. 
The Small Business Act (15 U.S.C. 632(a)) delegates to SBA's 
Administrator the responsibility for establishing small business 
definitions. The Act also requires that small business definitions vary 
to reflect industry differences. The Jobs Act also requires SBA to 
review all size standards and to make whatever adjustments are 
necessary to reflect market conditions. The supplementary information 
section of this rule explains SBA's methodology for analyzing a size 
standard for a particular industry.
2. What are the potential benefits and costs of this regulatory action?
    The most significant benefit to businesses becoming small because 
of this rule is gaining or retaining eligibility for Federal small 
business assistance programs. These include SBA's financial assistance 
programs, economic injury disaster loans, and Federal procurement 
programs intended for small businesses. Federal procurement programs 
provide targeted opportunities for small businesses under SBA's 
business development programs, such as 8(a), Small Disadvantaged 
Businesses (SDB), small businesses located in Historically 
Underutilized Business Zones (HUBZone), women-owned small businesses 
(WOSB), economically disadvantaged women-owned small businesses 
(EDWOSB), and service-disabled veteran-owned small businesses (SDVOSB). 
Federal agencies may also use SBA's size standards for a variety of 
other regulatory and program purposes. These programs assist small 
businesses to become more knowledgeable, stable, and competitive. SBA 
estimates that in 30 industries and three sub-industries 
(``exceptions'') for which it has increased size standards in this 
rule, more than 370 firms, not small under the existing size standards, 
will become small under the revised size standards and eligible for 
these programs. That is about 0.5 percent of all firms classified as 
small under the current size standards in all industries and sub-
industries reviewed in this rule. This should increase the small 
business share of total receipts in those industries from 18.3 percent 
to 21.3 percent. In the three industries for which reduced size 
standards apply, only the one or two largest firms will be impacted in 
each of them.
    Three groups will benefit from the size standards revisions in this 
rule: (1) Some businesses that are above the current size standards may 
gain small business status under the higher size standards, thus 
enabling them to participate in Federal small business assistance 
programs; (2) growing small businesses that are close to exceeding the 
current size standards may retain their small business status under the 
higher size standards, thereby enabling them to continue their 
participation in the programs; and (3) Federal agencies will have a 
larger pool of small businesses from which to draw for their small 
business procurement programs.
    SBA estimates that, based on Federal contracting data for fiscal 
years 2012-2014, firms gaining small business status under the revised 
size standards might receive Federal contracts totaling $85 million to 
$95 million annually under SBA's small business, 8(a), SDB, HUBZone, 
WOSB, EDWOSB, and SDVOSB Programs, and other unrestricted procurements. 
The added competition for many of these procurements may also result in 
lower prices to the Government for procurements reserved for small 
businesses, but SBA cannot quantify this benefit.
    Under SBA's 7(a) and 504 Loan Programs, based on the fiscal years 
2012-2014 data, SBA estimates up to about five SBA 7(a) and 504 loans 
totaling about $2.0 million might be made to these newly defined small 
businesses under the revised size standards. Increasing the size 
standards will likely result in more small business guaranteed loans to 
businesses in these industries, but it is impractical to try to 
estimate exactly the number and total amount of loans. There are two 
reasons for this: (1) Under the Jobs Act, SBA can now guarantee 
substantially larger loans than in the past; and (2) as described 
above, the Jobs Act established a higher alternative size standard ($15 
million in tangible net worth and $5 million in net income after income 
taxes) for business concerns that do not meet the size standards for 
their industry. Therefore, SBA finds it difficult to quantify the 
actual impact of the revised size standards on its 7(a) and 504 Loan 
Programs.
    Newly defined small businesses will also benefit from SBA's 
Economic Injury Disaster Loan (EIDL) Program. Since this program is 
contingent on the occurrence and severity of a disaster in the future, 
SBA cannot make a meaningful estimate of this impact.
    In addition, newly defined small businesses will also benefit 
through reduced fees, less paperwork, and fewer compliance requirements 
that are available to small businesses throughout the Federal 
government.
    To the extent that those 375 newly defined additional small firms 
could become active in Federal procurement programs, the revisions to 
size standards may entail some additional administrative costs to the 
government as a result of more businesses being eligible for Federal 
small business programs. For example, there will be more firms seeking 
SBA's guaranteed loans, more firms eligible for enrollment in the 
System of Award Management (SAM) database, and more firms seeking 
certification as 8(a) or HUBZone firms or qualifying for small 
business, WOSB, EDWOSB, SDVOSB, and SDB status. Among those newly 
defined small businesses seeking SBA's assistance, there could be some 
additional costs associated with compliance and verification of small 
business status and protests of small business or other status. 
However, SBA believes that these added administrative costs will be 
minimal because mechanisms are already in place to handle these 
requirements.
    Additionally, in some cases, Federal government contracts may have 
higher costs. With a greater number of businesses defined as small, 
Federal agencies may choose to set aside more contracts for competition 
among small businesses only rather than using full and open 
competition. The movement from unrestricted to small business set-aside 
contracting might result in competition among fewer total bidders, 
although there will be more small businesses eligible to submit offers. 
However, the additional costs associated with fewer bidders are 
expected to be minor since, by law, procurements may be set aside for 
small businesses or reserved for the 8(a), HUBZone, WOSB, EDWOSB, or 
SDVOSB Programs only if awards are expected to be made at fair and 
reasonable prices. In addition, there may be higher costs when more 
full and open contracts are awarded to HUBZone businesses that receive 
price evaluation preferences.

[[Page 4465]]

    The new size standards may have some distributional effects among 
large and small businesses. Although SBA cannot estimate with certainty 
the actual outcome of the gains and losses among small and large 
businesses, it can identify several probable impacts. There may be a 
transfer of some Federal contracts from large businesses to newly 
eligible small businesses. Large businesses may have fewer Federal 
contract opportunities as Federal agencies decide to set aside more 
contracts for small businesses. In addition, some Federal contracts may 
be awarded to HUBZone businesses instead of large businesses since 
these firms may be eligible for a price evaluation preference for 
contracts when they compete on a full and open basis.
    Similarly, some businesses defined small under the previous size 
standards may receive fewer Federal contracts due to increased 
competition from more businesses defined as small under the revised 
size standards. This transfer may be offset by a greater number of 
Federal procurements set aside for all small businesses. The number of 
newly defined and expanding small businesses that are willing and able 
to sell to the Federal government will limit the potential transfer of 
contracts from large and small businesses under the current size 
standards. SBA cannot estimate the potential distributional impacts of 
these transfers with any degree of precision.
    The revisions to the employee based size standards for these 33 
industries and three sub-industries are 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.

Executive Order 13563

    Descriptions of the need for this regulatory action and benefits 
and costs associated with this action including possible distributional 
impacts that relate to Executive Order 13563 are included in the 
Regulatory Impact Analysis under Executive Order 12866, above.
    In an effort to engage interested parties in this action, SBA 
presented its size standards methodology (discussed above under 
Supplementary Information) to various industry associations and trade 
groups. SBA also met with a number of industry groups and individual 
businesses to get their feedback on its methodology and other size 
standards issues. In addition, SBA presented its size standards 
methodology to businesses in 13 cities in the U.S. and sought their 
input as part of the Jobs Act tour. The presentation also included 
information on the latest status of the comprehensive size standards 
review and on how interested parties can provide SBA with input and 
feedback on its size standards review.
    Additionally, SBA sent letters to the Directors of the Offices of 
Small and Disadvantaged Business Utilization (OSDBU) at several Federal 
agencies with considerable procurement responsibilities requesting 
their feedback on how the agencies use SBA's size standards and whether 
current size standards meet their programmatic needs (both procurement 
and non-procurement). SBA gave appropriate consideration to all input, 
suggestions, recommendations, and relevant information obtained from 
industry groups, individual businesses, and Federal agencies in 
preparing this rule.
    The review of size standards in industries and sub-industries 
covered in this rule is consistent with Executive Order 13563, Section 
6, calling for retrospective analyses of existing rules. The last 
comprehensive review of size standards occurred during the late 1970s 
and early 1980s. Since then, except for periodic adjustments for 
monetary based size standards, most reviews of size standards were 
limited to a few specific industries in response to requests from the 
public and Federal agencies. The majority of employee based size 
standards have not been reviewed since they were first established. SBA 
recognizes that changes in industry structure and the Federal 
marketplace over time have rendered existing size standards for some 
industries no longer supportable by current data. Accordingly, in 2007, 
SBA began a comprehensive review of its size standards to ensure that 
existing size standards have supportable bases and to revise them when 
necessary. In addition, the Jobs Act requires SBA to conduct a detailed 
review of all size standards and to make appropriate adjustments to 
reflect market conditions. Specifically, the Jobs Act requires SBA to 
conduct a detailed review of at least one-third of all size standards 
during every 18-month period from the date of its enactment and do a 
complete review of all size standards not less frequently than once 
every 5 years thereafter.

Executive Order 12988

    This action meets applicable standards set forth in Sections 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. The action does not 
have retroactive or preemptive effect.

Executive Order 13132

    For purposes of Executive Order 13132, SBA has determined that this 
rule will not have substantial, direct effects on the States, on the 
relationship between the national government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government. Therefore, SBA has determined that this rule has no 
federalism implications warranting preparation of a federalism 
assessment.

Paperwork Reduction Act

    For the purpose of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, 
SBA has determined that this rule does not impose any new reporting or 
recordkeeping requirements.

Final Regulatory Flexibility Analysis

    Under the Regulatory Flexibility Act (RFA), this final rule may 
have a significant impact on a substantial number of small businesses 
in the industries and sub-industries covered by this rule. As described 
above, this rule may affect small businesses seeking Federal contracts, 
loans under SBA's 7(a), 504 and Economic Injury Disaster Loan Programs, 
and assistance under other Federal small business programs.
    Immediately below, SBA sets forth a final regulatory flexibility 
analysis (FRFA) of this rule addressing the following questions: (1) 
What are the need for and objective of the rule?; (2) What are SBA's 
description and estimate of the number of small businesses to which the 
rule will apply?; (3) What are the projected reporting, recordkeeping, 
and other compliance requirements of the rule?; (4) What are the 
relevant Federal rules that 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 businesses?
1. What are the need for and objective of the rule?
    Changes in industry structure, technological changes, productivity 
growth, mergers and acquisitions, and updated industry definitions have 
changed the structure of many

[[Page 4466]]

industries reviewed for this rule. Such changes can be sufficient to 
support revisions to current size standards for some industries. Based 
on the analysis of the latest data available, SBA believes that the 
revised size standards in this final rule more appropriately reflect 
the size of businesses that need Federal assistance. The Jobs Act also 
requires SBA to review all size standards and make necessary 
adjustments to reflect market conditions.
2. What are SBA's description and estimate of the number of small 
businesses to which the rule will apply?
    SBA estimates that about 375 additional firms may become small 
because of increased size standards for the 30 industries and three 
sub-industries covered by this rule. That represents 0.5 percent of 
total firms that are small under the previous size standards in all 
industries reviewed by SBA in the September 10, 2014 proposed rule. 
This will result in an increase in the small business share of total 
industry receipts for those industries from 18.3 percent under the 
current size standards to 21.3 percent under the proposed size 
standards. In the three industries for which SBA has proposed to reduce 
their size standards, only the one or two largest firms will be 
impacted in each of those industries. The revised size standards will 
enable more small businesses to retain their small business status for 
a longer period. Many firms may have lost their eligibility and find it 
difficult to compete at current size standards with companies that are 
significantly larger than they are. SBA believes that revisions to size 
standards will have a positive competitive impact on existing small 
businesses and on those that exceed the size standards but are on the 
very low end of those that are not small. They might otherwise be 
called or referred to as mid-sized businesses, although SBA only 
defines what is small; other entities are other than small.
3. What are the projected reporting, recordkeeping and other compliance 
requirements of the rule?
    The revised size standards impose no additional reporting or 
recordkeeping requirements on small businesses. However, qualifying for 
Federal procurement and a number of other programs requires that 
businesses register in the SAM database and certify in SAM that they 
are small at least once annually. Therefore, businesses opting to 
participate in those programs must comply with SAM requirements. 
However, there are no costs associated with SAM registration or 
certification. Changing size standards alters the access to SBA's 
programs that assist small businesses, but does not impose a regulatory 
burden because they neither regulate nor control business behavior.
4. What are the relevant Federal rules, which may duplicate, overlap or 
conflict with the rule?
    Under Sec.  3(a)(2)(C) of the Small Business Act, 15 U.S.C. 
632(a)(2)(c), Federal agencies must use SBA's size standards to define 
a small business, unless specifically authorized by statute to do 
otherwise. 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 57982 (November 24, 1995)). SBA is not aware of any 
Federal rule that would duplicate or conflict with establishing size 
standards.
    However, the Small Business Act and SBA's regulations allow Federal 
agencies to develop different size standards if they believe that SBA's 
size standards are not appropriate for their programs, with the 
approval of SBA's Administrator (13 CFR 121.903). The Regulatory 
Flexibility Act authorizes an agency to establish an alternative small 
business definition for purposes of that Act, after consultation with 
the Office of Advocacy of the U.S. Small Business Administration (5 
U.S.C. 601(3)).
5. What alternatives will allow the Agency to accomplish its regulatory 
objectives while minimizing the impact on small entities?
    By law, SBA is required to develop numerical size standards for 
establishing eligibility for Federal small business assistance 
programs. Other than varying size standards by industry and changing 
the size measures, no practical alternative exists to the systems of 
numerical size standards.

List of Subjects in 13 CFR Part 121

    Administrative practice and procedure, Government procurement, 
Government property, Grant programs--business, Individuals with 
disabilities, Loan programs--business, Reporting and recordkeeping 
requirements, Small businesses.
    For the reasons set forth in the preamble, SBA amends 13 CFR part 
121 as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

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

    Authority:  15 U.S.C. 632, 634(b)(6), 662, and 694a(9).

0
2. Amend Sec.  121.201 in the table ``Small Business Size Standards by 
NAICS Industry'' as follows:
0
a. Revise the entries for ``211111'', ``211112'', ``212111'', 
``212112'', ``212113'', ``212210'', ``212221'', ``212222'', ``212231'', 
``212234'', ``212291'', ``212299'', ``212312'', ``212313'', ``212324'', 
``212391'', ``212392'', ``213111'', ``221210'', ''482112'', ``483112'', 
``483113'', ``483211'', ``511110'', ``511120'', ``511130'', ``511140'', 
``511191'', ``512220'', ``512230'', ``519130'', ``541711'', ``541712'' 
introductory entry and first, second and third sub-entry, and 
``562910'' sub-entry.''
0
b. Amend the entry for ``481211'' by removing the sub-entry ``Except,'' 
``Offshore Marine Air Transportation Services'' ``$30.5''.
0
c. Amend the entry for ``481212'' by removing the sub-entry ``Except,'' 
``Offshore Marine Air Transportation Services'' ``$30.5''.
0
d. Amend the entry for ``Subsector 483--Water Transportation'' by 
removing superscript ``15''.
0
e. Revise Footnote 11.
0
f. Remove Footnote 15 and reserve Footnote 15.
0
g. Revise Footnote 18.
    The revisions 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  Size standards
                NAICS codes                       NAICS U.S. industry title         in millions    in number  of
                                                                                    of dollars       employees
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
211111.....................................  Crude Petroleum and Natural Gas      ..............           1,250
                                              Extraction.

[[Page 4467]]

 
211112.....................................  Natural Gas Liquid Extraction......  ..............             750
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
212111.....................................  Bituminous Coal and Lignite Surface  ..............           1,250
                                              Mining.
212112.....................................  Bituminous Coal Underground Mining.  ..............           1,500
212113.....................................  Anthracite Mining..................  ..............             250
212210.....................................  Iron Ore Mining....................  ..............             750
212221.....................................  Gold Ore Mining....................  ..............           1,500
212222.....................................  Silver Ore Mining..................  ..............             250
212231.....................................  Lead Ore and Zinc Ore Mining.......  ..............             750
212234.....................................  Copper Ore and Nickel Ore Mining...  ..............           1,500
212291.....................................  Uranium[dash]Radium[dash]Vanadium    ..............             250
                                              Ore Mining.
212299.....................................  All Other Metal Ore Mining.........  ..............             750
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
212312.....................................  Crushed and Broken Limestone Mining  ..............             750
                                              and Quarrying.
212313.....................................  Crushed and Broken Granite Mining    ..............             750
                                              and Quarrying.
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
212324.....................................  Kaolin and Ball Clay Mining........  ..............             750
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
212391.....................................  Potash, Soda, and Borate Mineral     ..............             750
                                              Mining.
212392.....................................  Phosphate Rock Mining..............  ..............           1,000
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
213111.....................................  Drilling Oil and Gas Wells.........  ..............           1,000
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
221210.....................................  Natural Gas Distribution...........  ..............           1,000
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
481211.....................................  Nonscheduled Chartered Passenger     ..............           1,500
                                              Air Transportation.
----------------------------------------------------------------------------------------------------------------
481212.....................................  Nonscheduled Chartered Freight Air   ..............           1,500
                                              Transportation.
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
482112.....................................  Short Line Railroads...............  ..............           1,500
----------------------------------------------------------------------------------------------------------------
                                       Subsector 483--Water Transportation
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
483112.....................................  Deep Sea Passenger Transportation..  ..............           1,500
----------------------------------------------------------------------------------------------------------------
483113.....................................  Coastal and Great Lakes Freight      ..............             750
                                              Transportation.
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
483211.....................................  Inland Water Freight Transportation  ..............             750
----------------------------------------------------------------------------------------------------------------
 

[[Page 4468]]

 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
511110.....................................  Newspaper Publishers...............  ..............           1,000
----------------------------------------------------------------------------------------------------------------
511120.....................................  Periodical Publishers..............  ..............           1,000
511130.....................................  Book Publishers....................  ..............           1,000
511140.....................................  Directory and Mailing List           ..............           1,250
                                              Publishers.
511191.....................................  Greeting Card Publishers...........  ..............           1,500
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
512220.....................................  Integrated Record Production/        ..............           1,250
                                              Distribution.
512230.....................................  Music Publishers...................  ..............             750
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
519130.....................................  Internet Publishing and              ..............           1,000
                                              Broadcasting and Web Search
                                              Portals.
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
541711.....................................  Research and Development in          ..............      \11\ 1,000
                                              Biotechnology \11\.
----------------------------------------------------------------------------------------------------------------
541712.....................................  Research and Development in the      ..............      \11\ 1,000
                                              Physical, Engineering, and Life
                                              Sciences (except Biotechnology)
                                              \11\.
Except,....................................  Aircraft, Aircraft Engine, and       ..............           1,500
                                              Engine Parts.
Except,....................................  Other Aircraft Parts and Auxiliary   ..............           1,250
                                              Equipment.
Except,....................................  Guided Missiles and Space Vehicles,  ..............           1,250
                                              Their Propulsion Units and
                                              Propulsion Parts.
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
562910.....................................  Remediation Services...............         $20.5.0  ..............
----------------------------------------------------------------------------------------------------------------
Except,....................................  Environmental Remediation Services   ..............        \14\ 750
                                              \14\.
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------

    Footnotes
* * * * *
    11. NAICS code 541711 and 541712--
    (a) ``Research and Development'' means laboratory or other 
physical research and development. It does not include economic, 
educational, engineering, operations, systems, or other nonphysical 
research; or computer programming, data processing, commercial and/
or medical laboratory testing.
    (b) For research and development contracts requiring the 
delivery of a manufactured product, the appropriate size standard is 
that of the manufacturing industry.
    (c) For purposes of the Small Business Innovation Research 
(SBIR) program only, a different definition has been established by 
law. See Sec.  121.701 of these regulations.
    (d) ``Research and Development'' for guided missiles and space 
vehicles includes evaluations and simulation, and other services 
requiring thorough knowledge of complete missiles and spacecraft.
* * * * *
    14. NAICS 562910--Environmental Remediation Services:
    (a) For SBA assistance as a small business concern in the 
industry of Environmental Remediation Services, other than for 
Government procurement, a concern must be engaged primarily in 
furnishing a range of services for the remediation of a contaminated 
environment to an acceptable condition including, but not limited 
to, preliminary assessment, site inspection, testing, remedial 
investigation, feasibility studies, remedial design, containment, 
remedial action, removal of contaminated materials, storage of 
contaminated materials and security and site closeouts. If one of 
such activities accounts for 50 percent or more of a concern's total 
revenues, employees, or other related factors, the concern's primary 
industry is that of the particular industry and not the 
Environmental Remediation Services Industry.
    (b) For purposes of classifying a Government procurement as 
Environmental Remediation Services, the general purpose of the 
procurement must be to restore or directly support the restoration 
of a contaminated environment (such as, preliminary assessment, site 
inspection, testing, remedial investigation, feasibility studies, 
remedial design, remediation services, containment, removal of 
contaminated materials, storage of contaminated materials or 
security and site closeouts), although the general purpose of the 
procurement need not necessarily include remedial actions. Also, the 
procurement must be composed of activities in three or more separate 
industries with separate NAICS codes or, in some instances (e.g., 
engineering), smaller sub-components of NAICS codes with separate, 
distinct size standards. These activities may include, but are not 
limited to, separate activities in industries such as: Heavy 
Construction; Specialty Trade Contractors; Engineering Services; 
Architectural Services; Management Consulting Services; Hazardous 
and Other Waste Collection; Remediation Services, Testing 
Laboratories; and Research and Development in the Physical, 
Engineering and Life Sciences. If any activity in the procurement 
can be identified with a separate NAICS code, or component of a code

[[Page 4469]]

with a separate distinct size standard, and that industry accounts 
for 50 percent or more of the value of the entire procurement, then 
the proper size standard is the one for that particular industry, 
and not the Environmental Remediation Service size standard.
* * * * *
    18. NAICS code 541519--An Information Technology Value Added 
Reseller (ITVAR) provides a total solution to information technology 
acquisitions by providing multi-vendor hardware and software along 
with significant value added 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 exception and 150-
employee size standard must consist of at least 15% and not more 
than 50% of value added services, as measured by the total contract 
price. In addition, the offeror must comply with the manufacturing 
performance requirements, or comply with the non-manufacturer rule 
by supplying the products of small business concerns, unless SBA has 
issued a class or contract specific waiver of the non-manufacturer 
rule. 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.
* * * * *

0
3. Amend Sec.  121.406 by revising paragraph (b)(3) and paragraphs 
(b)(4) introductory text and (b)(5) introductory text to read as 
follows:


Sec.  121.406  How does a small business concern qualify to provide 
manufactured products or other supply items under a small business set-
aside, service-disabled veteran-owned small business set-aside, WOSB or 
EDWOSB set-aside, or 8(a) contract?

* * * * *
    (b) * * *
    (3) The nonmanufacturer rule applies only to procurements that have 
been assigned a manufacturing or supply NAICS code, or the Information 
Technology Value Added Resellers (ITVAR) exception to NAICS code 
541519. The nonmanufacturer rule does not apply to contracts that have 
been assigned a service (except for the ITVAR exception to NAICS code 
541519), construction, or specialty trade construction NAICS code.
    (4) The nonmanufacturer rule applies only to the supply component 
of a requirement classified as a manufacturing, supply, or ITVAR 
contract. If a requirement is classified as a service contract, but 
also has a supply component, the nonmanufacturer rule does not apply to 
the supply component of the requirement.
* * * * *
    (5) The Administrator or designee may waive the requirement set 
forth in paragraph (b)(1)(iv) of this section under the following two 
circumstances:
* * * * *

Maria Contreras-Sweet,
Administrator.
[FR Doc. 2016-00922 Filed 1-25-16; 8:45 am]
BILLING CODE 8025-01-P