[Federal Register Volume 65, Number 154 (Wednesday, August 9, 2000)]
[Rules and Regulations]
[Pages 48601-48605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-19018]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 65, No. 154 / Wednesday, August 9, 2000 /
Rules and Regulations
[[Page 48601]]
SMALL BUSINESS ADMINISTRATION
13 CFR Part 121
Small Business Size Standards; Arrangement of Transportation of
Freight and Cargo
AGENCY: Small Business Administration.
ACTION: Final rule.
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SUMMARY: The Small Business Administration (SBA) is establishing a size
standard of $5.0 million in average annual receipts for the Arrangement
of Transportation of Freight and Cargo industry (Standard Industrial
Classification (SIC) code 4731). In addition, for brokers and agents in
this industry such as Freight Forwarders and Customs Brokers, SBA is
also changing the way average annual receipts are calculated for these
firms to allow pass-through of funds held in trust for unaffiliated
third parties. SBA is adopting two exceptions to this size standard.
For Non-Vessel Owning Common Carriers and for Household Goods
Forwarders (who sometimes classify themselves in SIC 4731), the current
$18.5 million size standard will remain in effect. These revisions
better define the size of business in this industry that SBA believes
should be eligible for Federal small business assistance programs.
DATES: This rule is effective on September 8, 2000.
FOR FURTHER INFORMATION CONTACT: Patricia Holden, Office of Size
Standards, (202) 205-6385.
SUPPLEMENTARY INFORMATION: SBA has received requests from the public to
review the size standard for the Arrangement of Transportation of
Freight and Cargo industry (Standard Industrial Classification (SIC)
code 4731). In particular, these requests express a concern about the
method in which average annual receipts are calculated for Freight
Forwarders and Custom Brokers within this industry. In response to
those requests, on July 26, 1999, SBA published a proposed rule to
revise the size standard for the Arrangement of Transportation of
Freight and Cargo industry from $18.5 million to $5.0 million. (See 64
FR 40314.) The rule also proposed to revise the way average annual
receipts are calculated to exclude pass-through of funds held in trust
for unaffiliated third parties.
SBA proposed this size standard based on its analysis of the latest
available U.S. Bureau of the Census (the Census Bureau) industry data
for SIC 4731 and Federal contract award data from the Federal
Procurement Data Center. SBA evaluated certain factors describing the
economic characteristics of firms in the Arrangement of Transportation
of Freight and Cargo industry. These factors were average firm size,
the distribution of industry revenues by size of firm, start-up costs,
and industry competition. SBA compared the characteristics of the
Arrangement of Transportation of Freight and Cargo industry to the
average characteristics of all industries with a $5.0 million size
standard which is the most common size standard established for
nonmanufacturing industries and is referred to as the ``anchor'' size
standard for the nonmanufacturing industries. Doing so enabled SBA to
determine if the size standard for Arrangement of Transportation of
Freight and Cargo industry should be higher, lower or the same as the
$5 million anchor size standard. In addition, SBA reviewed the percent
of total Federal contract dollars awarded to small businesses to
determine if they were obtaining a reasonable share of Federal
contracts. For a further discussion of SBA's size standards methodology
and the analyses leading to the proposed size standard see the proposed
rule of July 26, 1999 (64 FR 40314).
We also evaluated whether certain funds should be excluded in the
calculation of a firm's average annual receipts. We examined five
industry characteristics under which it might be appropriate to exclude
from a firm's receipts funds received for and then later transmitted to
an unaffiliated third party. These five characteristics are: (1) A
broker or agent-like relationship exists between a firm and a third
party provider and this relationship represents a dominant or crucial
activity of firms in the industry; (2) the pass-through funds
associated with the broker or agent-like relationship are a significant
portion of the firm's total receipts; (3) consistent with the normal
business practice of firms in the industry, a firm's income remaining
after the pass-through funds are remitted to a third party is typically
derived from a standard commission or fee; (4) the firm does not
usually consider billings that are reimbursed to other firms as its own
income, preferring instead to count only receipts that are retained for
its own use; and, (5) Federal government agencies which engage in the
collection of statistics and other industry analysts typically
represent receipts of the industry firms on an adjusted receipts basis.
SBA's review of information found that these characteristics generally
exist for the bulk of firms in the industry. Since most firms
classified in this industry are Freight Forwarders and Customs Brokers
who work on commission, those characteristics supported the proposal to
exclude from the calculation of a firm's receipts funds received in
trust for unaffiliated third parties.
The comments we received revealed that among the 19 activities
listed in SIC 4731, there are two major types of firms in the
industry--those that operate as agents/brokers and have funds held in
trust for others, and those that do not. For those that operate as
agents/brokers the two changes proposed in the rule work together and
result in an effective increase in their size standard. For those that
do not, the size standard is effectively reduced because they do not
benefit from the pass-through provision. To address the different
situations between the two groups, we are retaining the current size
standard for some of the 19 activities, while adopting the proposed
size standard for most other types of firms in SIC 4731. The final rule
makes explicit how the remaining non-agent/broker firms included in SIC
4731 are affected by this change in the size standard. We clarify which
activities in SIC 4731 will have a size standard of $5.0 million, which
activities will benefit from the exclusion of pass-through of funds
held in trust in calculating average annual receipts, and which
activities continue to use the $18.5 million on gross receipts.
[[Page 48602]]
This final rule adopts a size standard of $5.0 million in average
annual receipts (after excluding funds received in trust for
unaffiliated third parties) for all firms in SIC 4731, except for
Household Goods Forwarders and Non-Vessel Owning Common Carriers. Firms
engaged in agent/broker activities, such as Freight Forwarder and
Customs Broker, receive a significant amount of receipts as pass-
through funds which will not be counted in calculating their size.
Activities listed in SIC 4731 in which firms do not operate as agents/
brokers, such as Freight Consolidation, Freight Rate Auditors, and
Tariff Consultants, will also have a size standard of $5.0 million in
average annual receipts. However, the calculation of their average
annual receipts will be the same as before since they do not receive
pass-through funds. Although these firms will not benefit directly from
the pass-through exclusion, SBA's analysis of the characteristics of
firms in SIC 4731 strongly support the $5 million size standard for
this industry. We received no comments from any of these firms in SIC
4731 indicating otherwise.
Included in SIC 4731 but not listed among the 19 activities, is one
activity which does not operate either as auditor/consultant or as
broker/agent. It is the Non-Vessel Owning Common Carriers. They acquire
bulk space on vessels they do not own and sell that space in smaller
units to shippers. They do not operate on an agency basis or hold funds
in trust for unaffiliated third parties. They therefore must calculate
average annual receipts based on gross receipts. These firms have
substantial expenses not usually incurred by either the ``arranging''
or ``auditing'' types of firms. The $5.0 million size standard would
not be reflective of their size operation, therefore we have decided to
retain the size standard of $18.5 million for Non-Vessel Owning Common
Carriers.
A group of firms not included as part of SIC 4731, but who
sometimes use that SIC code for Federal contracting purposes, is
Household Goods Forwarders. These firms also incur substantial
investment and overhead (such as owning or leasing large trucks and
employing drivers) not usually found in the ``arranging'' or
``auditing'' firms. They do not operate on commission as agents and do
not hold funds in trust for unaffiliated third parties that can be
``passed-through'' when calculating average annual receipts. To change
their size standard from $18.5 million to $5.0 million without benefit
of the pass-through provision would have an unintentional adverse
impact. Therefore, we are also retaining the $18.5 million size
standard for Household Goods Forwarders. This is the same size standard
for movers in the transportation industries in Major Group 42.
Discussion of Comments
SBA received 12 timely comments on the proposed SIC 4731 size
standards. Two comments are from associations and 10 are from
businesses. Nine of the 12 comments opposed the proposed size standard.
The objections are from Household Goods Forwarders and Non-Vessel
Owning Common Carriers who do not receive any funds that would qualify
for the pass-through provision and so would see their size standard
reduced. The three comments in support of the proposed size standard
are from the Freight Forwarders and Customs Brokers who operate on
commissions and fees and who comprise the majority of the firms in SIC
4731. The benefit to this group by allowing average annual receipts to
be calculated after excluding pass-through funds effectively increases
their size standard by about three times even though the nominal size
standard is decreased.
One firm, that operates as a freight forwarder on a commission
basis, was strongly in favor of the proposed changes. The commenter
discussed the substantial benefit the proposed change in size standard
would have for his firm and the approximately 500 other similar firms
in his area.
A Freight Forwarder and Customs Broker association, representing
over 1,000 members, discussed the diversity of its membership. It noted
that ``SIC 4731 is not a homogenous classification''. It explained that
there are two subsets of activities that operate within the Arrangement
of Transportation of Freight and Cargo industry: Household Goods
Forwarders and Non-Vessel Owning Common Carriers. The association
expressed support for the speedy adoption of the proposed rule for its
members who operate as agents/brokers on commission. It also urged SBA
to segregate the industries within SIC 4731 and to establish a
different size standard for those industries that operate on contract
or profit from leasing and sub-leasing activities. Their alternate
recommendation, if SBA was to adopt a ``one-size-fits-all'' size
standard, is to make the size standard $10.0 million, not $5.0 million.
Another association also partially supported the proposed rule
changes. It represents a large membership divided between those who
operate as Freight Forwarders and Customs Brokers for commissions and
fees and those who operate as Household Movers on a contract (and sub-
contract) basis. It discussed how the activities of its members are
diverse enough that different regulatory agencies are responsible for
licensing and oversight. The Household Movers are licensed by the
Federal Highway Administration (FHWA) while the Freight Forwarders are
licensed by the Federal Maritime Commission (FMC). This association
also urged us to adopt two different size standards for the industries
within SIC 4731. It recommended that SBA retain ``the present $18.5
million standard for FHWA freight forwarders and adopt the $5 million
standard with its concomitant reduction in receipts for pass-through
funds for companies that are engaged in business as FMC ocean freight
forwarders and/or customs brokers.''
One group of comments opposing the proposed rule changes was from
firms engaged in household moving and storage. Many of these firms
obtain contracts from the Department of Defense on a ``Single Rate
Factor'' for ``door-to-door'' service and subcontract out parts of the
contract. They pay the subcontractor (e.g., the long-distance hauler)
out of the single rate. Since these firms do not operate on commission
and hold no pass-through funds, the proposed rule would have
significantly reduced their size standard. Some of these firms have the
word ``forwarder'' in their names, but their comments describe their
activities as the actual mover or as the general contractor responsible
for the entire move. For example, their comments included statements
such as: ``they have to invest in equipment/trucks; * * * sometimes use
third parties in providing door-to-door service, but never on an agent-
like relationship;'' they are ``active in the movement of personal
household goods''; ``sometimes they provide storage;'' ``they use the
services of port agents, etc., but not as brokers;'' they are
``primarily a household goods forwarder providing door-to-door moving
service for the Department of Defense * * * using the ``Single-Rate
Factor'' on a contract basis;'' and ``as a small business in the moving
industry * * *'' Only one of the comments from these firms noted that
the five industry characteristics discussed in the proposed rule
``clearly defines brokers'' and agreed that, ``it might be appropriate
to exclude certain funds'' in those cases.
The other group of firms that objected to the change in the
proposed size standard operate as entrepreneurs. They are not agents or
brokers and they do
[[Page 48603]]
not operate off of the ``one-rate'' fee schedule as do the Household
Goods Forwarders. This group, known as Non-Vessel Owning Common
Carriers, acquire large (bulk) space on ships they do not own, then
``retail'' that space in smaller lots to actual shippers. They do not
view themselves as transportation firms in Major Group 42
(Transportation) because they neither own the ships nor drive the
trucks (as do household movers). Their income is derived through the
profit (or loss) from the resale of space they acquire in bulk from
ship owners. If the ship sails before they have sold all their space,
it is possible for the cost of the space to exceed the income derived
from the space. They assume that risk as entrepreneurs. In this
respect, they operate like wholesalers. The relevant point for this
size standard is that their income (like Household Goods Forwarders) is
not derived on a commission or fee basis. If the proposed size standard
were adopted, they would be limited to the $5.0 million size standard
without the benefit of the pass-through funds exclusion because they do
not hold any such funds in trust for unaffiliated third parties. They
are not currently listed as one of the 19 activities in SIC 4731.
Never-the-less, the Census Bureau advised us that they are included in
this SIC.
The comments from Household Goods Forwarders and Non-Vessel Owning
Common Carriers express a consistent and serious concern. For
businesses between $5.0 million and $18.5 million in size that do not
operate as agents or brokers that have substantial overhead such as
buying trucks or bulk ship space, and that do not derive any receipts
from commissions or fees that would qualify as pass-through funds, the
change in the size standard from $18.5 million to $5.0 million would
effectively lower the size standard and take away their current
eligibility to compete for Federal contracts reserved for small
business or obtain SBA financial assistance.
The comments revealed that two types of firms who do not operate on
commission would be significantly impacted by the proposed size
standard through an unintended lowering of the size standard. The
purpose of the proposed rule was to recognize that much of the receipts
of Freight Forwarders and Customs Brokers (like real estate agents) are
held in trust for others and should not be included in the calculation
of their size. SBA accepts the significance of the concerns of the
Household Goods Forwarders and the Non-Vessel Owning Common Carriers
and is therefore retaining the $18.5 million gross average annual
receipts size standard for these types of firms.
SBA believes the Household Goods Forwarders who use SIC 4731 will
be a small group. In most cases where firms do more than just
``arrange'' transportation, and do not operate as agents/brokers, SBA
believes that a different SIC code is usually more appropriate.
Household goods moving and storage is listed by name in SIC 4213
(Trucking, Except Local), SIC 4214 (Local Trucking with Storage), and
SIC 4226 (Special Warehousing and Storage, Not Elsewhere Classified).
The size standard for these industries is $18.5 million.
The distinction between firms actually moving freight and cargo and
those that only arrange or provide transportation services will be more
obvious in the North American Industry Classification System (NAICS)
which will be effective October 1, 2000 for size standard purposes (see
further discussion below). Household movers will be classified in NAICS
code 484210--``Used Household and Office Goods Moving,'' not Freight
Forwarding. The same $18.5 million size standard now applicable to the
Transportation industries was also included in the NAICS final rule (65
FR 30836, dated May 15, 2000).
NAICS code 484210 is comprised of parts of SIC 4212, 4213 and 4214
(See NAICS Manual at 859). The definition states ``This industry
comprises establishments primarily engaged in providing local or long-
distance trucking of used household, used institutional, or used
commercial furniture and equipment. Incidental packing and storage
activities are often provided by these establishments.''(See NAICS
Manual at 471). We are aware that some of the activities in which
moving firms engage can be classified as ``arranging'' transportation
of freight or cargo. However, firms that provide multiple services
should classify themselves under the SIC or NAICS code for their
dominant activity. Firms that provide trucks and staff to actually
pack, load trucks, drive trucks, store goods on a temporary basis, but
who also subcontract out (``arrange for'') parts of the job they cannot
or chose not to handle, are more properly classified under an
appropriate code within Major Group 42 in the SIC Manual because acting
as agents or brokers is not their dominant activity.
In the proposed rule, SBA asked for comments on whether or not
Freight Forwarders and Customs Brokers that work on commission usually
work for about 6 percent to 10 percent of the total billing. One
association responded to this question. It polled its members and
verified that the range of commissions is approximately 6 percent to 10
percent.
We accepted the comments and are retaining the $18.5 million size
standard for Household Goods Forwarders and Non-Vessel Owning Common
Carriers who classify themselves in SIC 4731. This is also the size
standard for the transportation industries in Major Group 42
(Transportation) so that regardless of how a Moving and Storage or Non-
Vessel Owning Common Carrier firm is classified, it has the same size
standard. We believe this is a better approach than establishing a
$10.0 million size standard for all firms in SIC 4731 since it takes
into account the differences in the firms currently classified under
this size standard.
Furthermore, the Census Bureau data does not support a size
standard as high as $10.0 million for the entire industry. The Census
data collects revenue information in this industry excluding funds
received for unaffiliated third parties. Therefore, the data is
collected as if the pass-through provision is in effect. We recognize
that not all firms in SIC 4731 have trust funds to exclude. Even so,
(except for the Non-Vessel Owning Common Carriers and the Household
Goods Forwarders) a size standard of $5.0 million fit the data well
when differences in how the broker/agent and auditor/consultant firms
(classified in SIC 4731) account for their funds are explicitly
recognized. The Census Bureau is already making that accommodation in
data collection.
Reclassification of Activities Under the North American Industry
Classification System
The 19 activities currently listed in SIC 4731 will be divided into
two industries under the NAICS, which SBA will adopt on October 1, 2000
for its size standards. SBA published a final rule in the Federal
Register May 15, 2000 to adopt the NAICS classification, listing each
industry and its corresponding size standard (65 FR 30836). SBA's final
rule established guidelines to use in cases where activities included
in a SIC code were reclassified in NAICS. Newly created classifications
generally retained the same size standards that the activity had under
the SIC classification. In cases where an activity was removed from one
industry group to be included in another industry group, the proposed
rule stipulated that the size standard for that industry group would be
that of the predominant activity.
As mentioned above, activities currently listed in SIC 4731 will be
put into two different classifications in
[[Page 48604]]
NAICS. Firms that do not operate as agent/brokers such as Freight Rate
Auditors and Tariff Consultants currently listed in SIC 4731 will be
classified as NAICS 541614, ``Process, Physical Distribution, and
Logistics Consulting'' which is part of ``Management Consulting
Services.'' Other non-agent/broker activities currently included in SIC
4731 include Freight Rate Information Service, Tariff Rate Information
Service, Transport Clearinghouse, Transportation Rate Service, Customs
Clearance of Freight, Freight Consolidation, Shipping Documents
Preparation, and Freight Agencies Railroad, (not operated by Railroad
Companies). Of these, Freight Rate Information Service, Freight
Consolidation, and Freight Agencies Railroad, (not operated by Railroad
Companies) are reclassified as ``Freight Traffic Consulting Services,''
``Freight Rate Consulting Services'' or ``Transportation Management
Consulting Services'' and are also in NAICS 541614.
Using the NAICS procedures for establishing size standards when
industries are reclassified, when Tariff Consultants and Freight Rate
Auditors are added to the `Logistics' industry (NAICS code 541614),
they will have the same $5.0 million size standard applicable to the
entire `Logistics' industry. This size standard is consistent with what
was proposed for these activities as part of SIC 4731 and what we are
adopting in this final rule. All activities in NAICS 541614 will have
the $5.0 million size standard and there is no pass-through of
commissions for the non-commission entities.
All other activities currently listed in SIC 4731, including agent/
broker activities who ``arrange transportation'' are classified in
NAICS 488510, ``Freight Transportation Arrangement.'' It will be a more
homogenous group of firms in NAICS than in the SIC. It is described in
the NAICS manual (page 487) as establishments that are ``usually known
as freight forwarders, marine shipping agents, or customs brokers, and
offer a combination of services * * *.'' The SBA will also adopt the $5
million size standard for NAICS 488510 when it establishes NAICS-based
size standards. It will also allow pass-through of trust funds when
calculating average annual receipts for those firms that hold funds in
trust for unaffiliated third parties.
Compliance With Executive Orders 12866, 12988, and 13132, the
Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork
Reduction Act (44 U.S.C. 3501, Ch. 35.)
This rule is a ``significant'' regulatory action under Executive
Order 12866 and was reviewed by the Office of Management and Budget.
However, it is noteworthy that the total value of Federal procurement
and SBA guaranteed loans combined is less than $50 million annually to
this $9.1 billion industry (1992 Economic data). It is unlikely that
these programs would be significantly affected by this change to the
size standard. Although potentially 1,000 firms could gain small
business status as a result of this rule, historically only a very
small percentage of firms in the industry compete for Federal
procurements or obtain guaranteed loans through SBA's financial
assistance programs.
For purposes of Executive Order 12988, SBA has determined that this
rule is drafted, to the extent practicable, in accordance with the
standards set forth in Section 3 of that Order.
For purposes of Executive Order 13132, SBA has determined that this
rule does not have federalism implications warranting the preparation
of a Federalism Assessment.
For purposes of the Regulatory Flexibility Act, this rule will not
have a substantial impact on a significant number of small entities. As
mentioned above, although potentially 1,000 additional firms could gain
small business status as a result of this rule, historically only a
very small percentage of firms in the industry compete for Federal
procurements or obtain guaranteed loans through SBA's financial
assistance programs.
For the purpose of the Paperwork Reduction Act, 44 U.S.C. Ch. 35,
SBA has determined that this rule will not impose new reporting or
record-keeping requirements.
List of Subjects in 13 CFR Part 121
Administrative practice and procedure, Government procurement,
Government property, Grant programs--business, Loan programs--business,
Reporting and recordkeeping requirements, Small businesses.
For reasons stated in the preamble, SBA is amending 13 CFR part 121
as follows:
PART 121--SMALL BUSINESS SIZE REGULATIONS
1. The authority citation for part 121 continues to read as
follows:
Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), 644(c), and
662(5); and Sec. 304, Pub. L. 103-403, 108 Stat. 4175, 4188.
2. Revise Sec. 121.104(a)(1) to read as follows:
Sec. 121.104 How does SBA calculate annual receipts?
(a) * * *
(1) Receipts means ``total income'' (or in the case of a sole
proprietorship, ``gross income'') plus ``cost of goods sold'' as these
terms are defined or reported on Internal Revenue Service (IRS) Federal
tax return forms; Form 1120 for corporations; Form 1120S for Subchapter
S corporations; Form 1065 for partnerships; and Form 1040, Schedule F
for farm or Schedule C for sole proprietorships). However, the term
receipts excludes net capital gains or losses, taxes collected for and
remitted to a taxing authority if included in gross or total income,
proceeds from the transactions between a concern and its domestic or
foreign affiliates (if also excluded from gross or total income on a
consolidated return filed with the IRS), and amounts collected for
another by a travel agent, real estate agent, advertising agent,
conference management service provider, freight forwarder or customs
broker.
* * * * *
3. In Sec. 121.201, currently in effect, amend the table ``Size
Standards by SIC Industry'' as follows:
a. Under the heading Division E--Transportation, Communications,
Electric, Gas, and Sanitary Services, Major Group 47--Transportation
Services, revise the entry for 4731.
b. Revise footnote 6 at the end of the table.
The revisions read as follows:
Sec. 121.201 What size standards has SBA identified by Standard
Industrial Classification codes?
* * * * *
[[Page 48605]]
Size Standard by SIC Industry
------------------------------------------------------------------------
Size standards
in number of
SIC code and description employees or
millions of
dollars
------------------------------------------------------------------------
* * * *
* * *
------------------------------------------------------------------------
Division E--Transportation, Communications, Electric, Gas, and Sanitary
Services
------------------------------------------------------------------------
* * * *
* * *
4731 Arrangement of Transportation of Freight and Cargo. \6\ $5.0
Non-Vessel Owning Common Carriers and Household $18.5
Goods Forwarders...................................
* * * *
* * *
------------------------------------------------------------------------
Footnotes:
* * * * *
\6\ SIC codes 4724, 4731 (part), 6531,7311,7312, 7313, 7319, and 8741
(part): As measured by total revenues, but excluding funds received in
trust for an unaffiliated third party, such as bookings or sales
subject to commissions. The commissions received are included as
revenue.
* * * * *
Dated: July 14, 2000.
Fred P. Hochberg,
Deputy Administrator.
[FR Doc. 00-19018 Filed 8-8-00; 8:45 am]
BILLING CODE 8025-01-U