Small Business Size Standards, Inflation Adjustment to Size Standards; Business Loan Program; Disaster Assistance Loan Program, 72577-72595 [05-23435]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 70, Number 233 (Tuesday, December 6, 2005)]
[Rules and Regulations]
[Pages 72577-72595]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-23435]



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Federal Register / Vol. 70, No. 233 / Tuesday, December 6, 2005 / 
Rules and Regulations

[[Page 72577]]



SMALL BUSINESS ADMINISTRATION

13 CFR Parts 121 and 123

RIN 3245-AF41


Small Business Size Standards, Inflation Adjustment to Size 
Standards; Business Loan Program; Disaster Assistance Loan Program

AGENCY: Small Business Administration (SBA).

ACTION: Interim final rule with request for comments.

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

SUMMARY: SBA is adjusting its monetary-based size standards (e.g., 
receipts, net income, net worth, and financial assets), for the effect 
of inflation that has occurred since the last inflation adjustment in 
February 2002. Since the last inflation adjustment, the general level 
of prices has increased 8.7%. This action would restore small business 
eligibility to businesses that have lost that status due to inflation. 
In addition, this rule changes the process for determining the size of 
small business concerns applying for SBA Business Loans and Economic 
Injury Disaster Loans (EIDL) from a test considering only the primary 
industry of the applicant, to a two-part test considering both the 
primary industry of the applicant and the primary industry of the 
applicant with affiliates. This rule also changes the date on which SBA 
determines size status for purpose of EIDL applications for businesses 
located in disaster areas declared as a result of Hurricanes Katrina, 
Rita, and Wilma.

DATES: Effective Date: December 6, 2005.
    Applicability Dates: For purposes of Federal procurements, this 
rule applies to solicitations, except for noncompetitive section 8(a) 
contracts, issued on or after January 5, 2006. For purposes of 
noncompetitive section 8(a) contracting actions, the new size standards 
are applicable to offers of requirements that are accepted by SBA on or 
after January 5, 2006.
    Comment Period: Comments must be received by SBA on or before 
January 5, 2006.

ADDRESSES: You may submit comments identified by RIN 3245-AF41 by any 
of the following methods: (1) Federal eRulemaking Portal: https://
www.regulations.gov. Follow the instructions for submitting comments; 
(2) Fax: (202) 205-6390; or (3) Mail/ Hand Delivery/Courier: Gary M. 
Jackson, Assistant Administrator for Size Standards, 409 Third Street, 
SW., Mail Code, 6530, Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT: Carl Jordan or Diane Heal, Office of 
Size Standards, at (202) 205-6618 or at sizestandards@sba.gov.

SUPPLEMENTARY INFORMATION:

Inflationary Adjustment

    SBA is adjusting certain monetary-based size standards (e.g., 
receipts, net income, net worth, and financial assets) for the effect 
of inflation that has occurred since the last inflation adjustment that 
was effectuated on February 22, 2002 (67 FR 3041, January 23, 2002). 
From the third quarter of 2001 (the ending period for the last 
inflation adjustment) to the second quarter of 2005, the general level 
of prices in the United States increased approximately 8.7 percent as 
measured by the chain-type price index for Gross Domestic Product 
(GDP). The purpose of this action is to maintain the value of size 
standards in inflation-adjusted terms and to restore eligibility to 
businesses that may have lost their small business status due solely to 
price level increases rather than from increased business activity.
    While inflationary adjustments are not made on a fixed schedule, 
prior adjustments occurred in 2002, 1994 (59 FR 16513, April 7, 1994), 
1984 (49 FR 5024, February 9, 1984) and 1975 (40 FR 32824 as corrected 
by 40 FR 36310, August 5, 1975). This interim final rule also satisfies 
13 CFR 121.102(c) requiring SBA to assess the impact of inflation on 
its monetary-based size standards at least once every five years. This 
provision provides assurances to the public that SBA is monitoring 
inflation and is making a decision whether or not to adjust size 
standards within a reasonable period of time since its last inflation 
adjustment.
    In this rule, SBA is modifying its size standards after three-and-
one-half years in recognition that enough inflation has occurred to 
allow for an increase to SBA's ``anchor'' size standard of $6 million 
by a half-million dollar increment. SBA believes that this level of 
adjustment to its anchor size standard, while small, is nonetheless a 
meaningful increase which affects the small business eligibility of a 
relatively significant number of businesses. This rule also increases 
higher monetary size standards by $1 million to $2.5 million, depending 
on the current size standard. For example, the $21 million size 
standard for Computer Systems Design Services increases to $23 million 
since an 8.7 percent increase to that level of the size standard 
supports a $2 million increase (as explained in next section). As 
discussed in the regulatory flexibility analysis, SBA estimates that 
approximately 12,000 businesses would regain small business status as a 
result of this rule.
    Inflation has no impact on industry size standards based on number 
of employees, refining capacity, or electric generation. Thus, this 
rule makes no adjustment to these non-monetary size standards. Any 
change to a non-monetary size standard will be as a result of a 
specific review of industry characteristics.

How Does SBA Adjust Size Standards for Inflation?

    The methodology for adjusting the size standards for inflation is 
as follows:
    1. Selection of inflation measure: SBA used the chain-type price 
index for GDP as published by the U.S. Department of Commerce, Bureau 
of Economic Analysis (BEA), which is a broad measure of inflation for 
the economy as a whole, and is available on a quarterly basis.
    2. Selection of a base period: SBA selected the third quarter of 
2001 as the base period since this was the ending period of the last 
broad-based inflation adjustment in 2002. The chain-type price index 
for GDP stood at 102.690 at that time.
    3. Selection of an end period: We selected the second quarter of 
2005 as the end period for this inflation adjustment since it is the 
latest available quarterly data published by the BEA.

[[Page 72578]]

The chain type price index for GDP stood at 111.612 at that time.
    4. Calculation of inflation: Based on these price indexes, 
inflation increased 8.7% between the base and ending periods 
(((111.612/102.690) - 1.00) x 100 = 8.7%).
    5. Application of the inflation adjustment to the monetary-based 
size standards: The current size standards were multiplied by 1.087 and 
rounded to the closest $0.5 million.

Special Situations Regarding Inflation Adjustment

Small Business Investment Company (SBIC) Program

    Certain monetary-based size standards are not changed in this rule. 
The size standards for agricultural industries and for ``smaller 
enterprises'' under the SBIC Program are set by statute and, therefore, 
cannot be changed through rulemaking. SBA has elected not to change the 
alternate net worth and net income size standard for the Small Business 
Investment Companies (SBIC) Program. In 1994, the average net worth and 
net income criteria were increased threefold. Therefore, the current 
size standards remain in place for the SBIC Program and no further 
increase is deemed necessary at this time.

Size Standards Adjusted Since 2002

    SBA has changed several receipts-based size standards since the 
last inflation adjustment in 2002. SBA is applying the full inflation 
adjustment of 8.7 percent to those receipts-based size standards as 
well. When SBA establishes or revises a size standard, it does so in 
relation to other existing size standards to ensure that industries 
with similar characteristics have similar size standards. To provide a 
smaller adjustment, while technically precise, would be inconsistent 
with the size standards decision-making process.

Size Standards of $2 Million or Less

    At the time of the 2002 adjustment, prices had not increased by an 
amount sufficient to support increasing size standards of $2 million or 
less. The cumulative effects of inflation from the 2002 adjustment of 
15.8 percent and the current adjustment of 8.7 percent is sufficient to 
increase those size standards by a half-million dollar increment. 
Therefore, this interim final rule increases size standards of $2 
million or less by $0.5 million. Affected industries include real-
estate agents and cattle feedlots.

Program-Based Size Standards

    Most SBA programs apply size standards established for industries 
defined by the North American Industry Classification System (NAICS). 
This rule lists the size standard for each NAICS industry with a 
monetary-based size standard (except for the $750,000 statutorily 
established agricultural size standard). SBA has also established size 
standard(s) on a program basis rather than an industry basis, which are 
adjusted in the same manner as the industry-based size standards 
(except for the SBIC program as discussed above). The following table 
lists the program-based size standards and the changes adopted by this 
rule.

----------------------------------------------------------------------------------------------------------------
                                                                               Size standard
                                                          ------------------------------------------------------
              Program                    CFR citation       Current size                             New size
                                                            standard (in        Measurement        standard  (in
                                                              millions)                              millions)
----------------------------------------------------------------------------------------------------------------
504 Program.......................  13 CFR 121.301(b)....            $7.0  Net Worth............            $7.5
                                                                     $2.5  Net Income...........          * $2.5
                                                                                                      (retained)
Surety Bond Guarantee Assistance..  13 CFR 121.301(d)....            $6.0  Average Annual                   $6.5
                                                                            Receipts.
Sales of Government Property Other  13 CFR 121.502.......            $6.0  Average Annual                   $6.5
 Than Manufacturing (which uses                                             Receipts.
 employee-based size standards).
Stockpile Purchases...............  13 CFR 121.512.......           $48.5  Average Annual                  $51.5
                                                                            Receipts.
----------------------------------------------------------------------------------------------------------------
* The $2.5 million size standard is not being adjusted at this time since the inflation rate supports a change
  significantly less than $0.5 million.

Determining Size Eligibility for SBA Business Loans and Economic Injury 
Disaster Loans

    In 2004, SBA adopted a policy to determine size eligibility for its 
Business Loan and EIDL programs based on the primary industry of the 
applicant (69 FR 29192, May 21, 2004). Prior to that time, SBA utilized 
a two-step process that determined size eligibility for these programs 
based on the primary industry of the applicant and the primary industry 
of the applicant including its affiliates. SBA subsequently concluded 
that the two-step process was not only unnecessary but also the wording 
was unclear, causing confusion in its proper application (67 FR 70342, 
November 22, 2002). Since the implementation of the 2004 provision, SBA 
has come to the realization that a two-step size eligibility process is 
necessary to ensure that its financial loan programs equitably assist 
small businesses that have affiliates. Several loans that would have 
been approved under the previous two-step process have been denied 
under the existing regulation. However, SBA believes that those 
businesses should have been considered eligible for its small business 
financial assistance programs because the size of the applicant's 
affiliates are within the size standard for the industries in which 
they operate. Therefore, SBA is establishing a new two-step size 
eligibility provision for its financial assistance programs.
    The provision contained in this rule is very similar to SBA's 
previous regulation, but with additional language explaining how to 
determine size eligibility. The first step is to determine the primary 
industry and size of the applicant alone (i.e., without affiliates). If 
the applicant's size exceeds the applicable size standard, it is deemed 
ineligible. If the applicant's size does not exceed the applicable size 
standard, and has affiliates, the second step is triggered. The second 
step of the analysis is to determine the primary industry and size of 
the applicant including its affiliates. The applicant is eligible if 
the combined size of the applicant and its affiliates does not exceed 
either the size standard for the applicant's primary industry or the 
size standard for the primary industry of the applicant and its 
affiliates, whichever is higher.
    The selection of the higher of the two size standards under the 
two-part test avoids a number of problems that existed when SBA only 
considered the size standard for the primary industry of the applicant 
(as it had done before 2004). For example, two businesses operating in 
the same group of industries with a different distribution

[[Page 72579]]

of receipts or employees could result in a larger business qualifying 
for SBA assistance while a smaller business is denied. Under this 
rule's two-step process, the applicant must be small within its primary 
industry, but will not be found ineligible in cases where the size 
standard for the primary industry of the applicant and its affiliates 
is lower than the size standard of the applicant's primary industry.
    In some cases, the primary industry of the applicant alone and the 
primary industry of the applicant combined with its affiliates may have 
size standards based on a different measure of size. For example, a 
retail store applicant whose primary industry including its affiliates 
is wholesale trade will have the primary industry of a retail store 
based on average annual receipts while the primary industry of the 
applicant with affiliates is wholesale trade which is based on number 
of employees. In applying the two-step process, the size of the 
applicant combined with its affiliates must be compared against the 
same measure of size (receipts or employment) for the applicable size 
standard. Thus, in this scenario, if a retail store applicant (with a 
size standard based on receipts) whose primary industry including its 
affiliates is wholesale trade (with a size standard based on employees) 
is eligible under the receipts-based size standard, but ineligible 
under the employee-based size standard, the size standard which gives 
the benefit of the doubt to the applicant should be used.
    The above criteria for determining size eligibility for SBA's 
financial assistance programs depend on designating the primary 
industry of the applicant with and without affiliates. SBA's 
regulations at 13 CFR 121.107 provide the following guidance in making 
this designation:

    In determining the primary industry (kind of work) in which a 
concern or a concern combined with its affiliates is engaged, SBA 
considers the distribution of receipts, employees and costs of doing 
business among the different industries in which business operations 
occurred for the most recently completed fiscal year. SBA may also 
consider other factors, such as the distribution of patents, 
contract awards, and assets.

    Under this guidance, a determination must first be made of the kind 
of work a business performs and which among those activities represents 
the largest activity. Consideration of the percentage distribution of 
receipts and other factors among the various business activities may be 
relied upon in identifying the business's main activity. The industry 
this activity falls into is based on the industry definitions 
established by the NAICS. These definitions are listed in the NAICS 
United States, 2002 manual and may also be found in the U.S. Bureau of 
the Census Web site at https://www.census.gov/epcd/naics02/.
    For example, a business generating 70 percent of receipts from 
selling carpets and vinyl tiles to the general public and 30 percent of 
receipts from window treatments is primarily a floor covering retail 
store since that represents both a majority of its work and is its 
largest single business activity. NAICS classifies this activity under 
the industry of ``Floor Covering Stores'', NAICS code 442210. SBA's 
size standard for this industry is $6.5 million in average annual 
receipts.
    The determination of primary industry for applicants with 
affiliates involves a more detailed analysis, but is essentially the 
same process as above. For the applicant and each affiliate, identify 
the types of business activities performed and the level of revenues, 
employees or other appropriate factors. The business activity that 
accounts for the largest single activity represents the primary 
industry of the applicant and its affiliates. The examination of 
receipts should be the first consideration in determining primary 
industry. In some cases, however, receipts may not provide a clear 
picture, and it will be necessary to examine number of employees 
(emphasis should be placed on full-time employees) or other factors. In 
every case, the decision should be reasonable and justified.
    For example, there is an applicant that has two affiliates engaged 
in five business activities as follows:

----------------------------------------------------------------------------------------------------------------
                                                                  Size
         Business activity             NAICS  code  --------------------------------           Company
                                                          Sales         Employees
----------------------------------------------------------------------------------------------------------------
Carpet sales.......................          442210      $1,000,000              10  Applicant.
Wall covering sales................          442291         400,000               4  Applicant.
Blind manufacturing................          337920      10,000,000              25  Affiliate 1.
Draperies manufacturing............          314121         500,000               5  Affiliate 1.
Interior design....................          541410         500,000               8  Affiliate 2.
----------------------------------------------------------------------------------------------------------------

    The total size of the business is 52 employees and $12.4 million in 
sales. Blind manufacturing represents its largest activity, measured in 
terms of either sales or employees, and therefore, is the primary 
industry of the applicant and its affiliates. With a total of 52 
employees, the applicant and its affiliates do not exceed the 500 
employee size standard for NAICS 337920, Blind and Shade Manufacturing.

Justification for Determining the Size Status of Businesses Affected by 
the Hurricanes on the Date SBA Accepts EIDL Applications From Those 
Businesses

    SBA is also changing the date as of which size status is determined 
for purposes of Economic Injury Disaster Loan (EIDL) applications 
submitted by businesses located in disaster areas declared as a result 
of Hurricanes Katrina, Rita, and Wilma. Existing regulations at 13 CFR 
123.300(b) require an applicant for an EIDL loan to be small as of the 
date the disaster commenced, as set forth in the disaster declaration. 
SBA is changing the date on which SBA determines size status of those 
businesses to ``the date SBA accepts the application for processing.''
    This amendment would provide immediate access to SBA's EIDL program 
to those businesses that would have been ineligible prior to Hurricanes 
Katrina, Rita, and Wilma based solely as a result of inflation that has 
occurred since the SBA last adjusted its monetary-based size standards 
in 2002. Thousands of small businesses suffered substantial economic 
injury as a direct result of the hurricanes. EIDLs would provide funds 
to eligible small businesses to meet their ordinary and necessary 
operating expenses that they are unable to meet as a direct result of 
Hurricanes Katrina, Rita, or Wilma. This amendment to the date as of 
which businesses in the declared disaster areas are deemed small for 
purposes of the EIDL program would support the continuing operation of 
small businesses in the Gulf Coast region and in Florida, create jobs, 
and facilitate economic recovery of those communities.

[[Page 72580]]

Justification for Publication as an Interim Final Rule

    In general, SBA publishes a proposed rule for public comment before 
issuing a final rule, in accordance with the Administrative Procedure 
Act (APA) and SBA regulations, 5 U.S.C. 553 and 13 CFR 101.108. The APA 
provides an exception to this standard rulemaking process, however, in 
situations where an agency finds good cause to adopt a rule without 
prior public participation. (See 5 U.S.C. 553(b)(3)(B).) The good cause 
requirement is satisfied when prior public participation is 
impracticable, unnecessary, or contrary to the public interest. Under 
those conditions, an agency may publish an interim final rule without 
first soliciting public comment.
    In applying the good cause exception to standard rulemaking 
procedures, Congress recognized that emergencies (such as a response to 
a natural disaster) might arise justifying issuance of a rule without 
prior public participation. On August 29, 2005, the President declared 
major disaster areas in Louisiana, Mississippi, and Alabama in the 
aftermath of Hurricane Katrina. The President made the same 
declarations with respect to Louisiana and Texas as Hurricane Rita 
destroyed even more of the Gulf Coast region. On October 24, 2005, the 
President issued a disaster declaration pertaining to the areas in the 
state of Florida struck by Hurricane Wilma. These natural disasters 
have affected U.S. businesses in the declared disaster areas and across 
the Nation. Some of the affected businesses qualify as ``small'' under 
SBA size standards and are eligible for SBA assistance. However, some 
of the affected businesses have lost eligibility solely as a result of 
the inflation that has occurred since the SBA last adjusted its 
monetary-based size standards in 2002. This rule is necessary to make 
available SBA assistance to those businesses. In particular, this rule 
would make the EIDL program available to those businesses located in 
the disaster areas declared as a result of Hurricanes Katrina, Rita, 
and Wilma. Any delay in the adoption of these inflationary adjustments 
could cause serious harm to these businesses. In addition, small 
businesses would benefit from the changes to SBA's method of 
determining size eligibility for SBA's Business Loan and EIDL programs 
because it would expand availability of SBA assistance. Immediate 
implementation of this rule would facilitate economic recovery of the 
Gulf Coast region and is therefore in the best interest of the public.
    Accordingly, SBA finds that good cause exists to publish this rule 
as an interim final rule because of the urgent need to make disaster 
loans and other SBA assistance available to businesses that should be 
considered small, but no longer qualify under SBA's existing size 
standards due to inflation. Furthermore, advance solicitation of 
comments for this rulemaking would be impracticable and contrary to the 
public interest, as it would delay the delivery of critical assistance 
to these businesses by a minimum of four to six months. It is likely 
that some would be forced to cease operations before a rule could be 
promulgated under standard notice and comment rulemaking procedures.
    SBA's rationale for preparing this action as an interim final rule 
is consistent with the Agency's statutory obligation to act in the 
public interest in determining eligibility for Federal assistance under 
the Small Business Act, 15 U.S.C. 633(d). It is also consistent with 13 
CFR 123.1, under which SBA reserves the right to amend the Disaster 
Loan Program regulations without advance notice in response to 
disasters. Pursuant to those authorities, SBA has determined that it is 
in the public interest to give immediate effect to this rule. The 
failure to adopt this rule could work to the detriment of many small 
businesses.
    Although this rule is being published as an interim final rule, 
comments are hereby being solicited from interested parties. These 
comments must be received on or before January 5, 2006. SBA may then 
consider these comments in making any necessary revisions to these 
regulations.

Justification for Immediate Effective Date of Interim Final Rule

    The APA requires that ``publication or service of a substantive 
rule shall be made not less than 30 days before its effective date, 
except * * * as otherwise provided by the agency for good cause found 
and published with the rule,'' 5 U.S.C. 553(d)(3). SBA finds that good 
cause exists to make this final rule effective the same day it is 
published in the Federal Register.
    The purpose of the APA provision delaying the effective date of a 
rule for 30 days after publication is to provide interested and 
affected members of the public sufficient time to adjust their behavior 
before the rule takes effect. In this case, however, the 30-day delay 
is unnecessary because this interim final rule would not require 
businesses or SBA to make significant changes to their current 
procedures for applying for SBA assistance, or determining the status 
of businesses seeking SBA assistance, including Business Loans or 
EIDLs. SBA would begin applying the new size standards to businesses 
and the two-part size eligibility test upon publication of this interim 
final rule. For purposes of Federal procurements, however, the 
applicability dates are delayed for 30 days after the date of 
publication in this rule as described in the Dates section of the 
preamble for this rule. SBA believes, based on its contacts with 
interested members of the public, that there is strong interest in 
immediate implementation of this rule. This action is in the public 
interest and does not tend to adversely affect any interested parties. 
SBA expects little if any adverse comments on the inflation-adjusted 
size standards. Past inflation adjustments by SBA have received 
widespread support.

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. Ch. 35)

    The Office of Management and Budget (OMB) has determined that this 
rule constitutes a ``significant regulatory action'' under Executive 
Order 12866. A general discussion of the need for this regulatory 
action and its potential costs and benefits follows.

Regulatory Impact Analysis

i. Is there a need for the regulatory action?

    SBA's statutory mission is to aid and assist small businesses 
through a variety of financial, procurement, business development, and 
advocacy programs. To effectively assist intended beneficiaries of 
these programs, SBA must establish distinct definitions of which 
businesses are deemed small businesses. The Small Business Act (15 
U.S.C. 632(a)) (Act) delegates to the SBA Administrator the 
responsibility for establishing small business definitions. The Act 
also requires that small business definitions vary to reflect industry 
differences. The supplementary information to this interim final rule 
explains the approach SBA follows when adjusting size standards for 
inflation. Based on the rise in the general level of prices, SBA 
believes that an inflation adjustment to size standards is needed to 
better reflect small businesses in industries with monetary-based size 
standards.

ii. What are the potential benefits and costs of this regulatory 
action?

    The benefits of a size standard increase to a more appropriate 
level would accrue to three groups: (1) Businesses that benefit by 
gaining small

[[Page 72581]]

business status from the higher size standard that also use small 
business assistance programs; (2) growing small businesses that may 
exceed the current size standards in the near future and that will 
retain small business status from the higher size standard; and (3) 
Federal agencies that award contracts under procurement programs that 
require small business status.
    The most significant benefit to businesses obtaining small business 
status as a result of this rule is eligibility for Federal small 
business assistance programs. Under this rule, approximately 11,600 
additional firms generating 0.6 percent of sales in the adjusted 
industries will obtain small business status and become eligible for 
these programs. These include SBA's financial assistance programs, 
economic injury disaster loans, Federal procurement preference programs 
for small businesses (including 8(a) firms, small disadvantaged 
businesses, small businesses located in Historically Underutilized 
Business Zones (HUBZone), women-owned small businesses, and veteran-
owned and service disabled veteran-owned small businesses, and Federal 
contracts awarded through full and open competition after application 
of the HUBZone or small disadvantaged business price evaluation 
preference or adjustment). Through the assistance of these programs, 
small businesses may benefit by becoming more knowledgeable, stable, 
and competitive businesses.
    SBA estimates that up to $400 million in Federal contracts could be 
awarded to firms becoming newly-designated as small businesses under 
this rule. In fiscal year 2004, small businesses obtained $39.2 billion 
out of $170.5 billion in Federal contracts in industries with a 
monetary-based size standard. This estimate assumes that about half of 
the newly-defined small businesses participate in Federal contracting 
and they could obtain the same proportion of their industry share (one-
half of 0.6 percent) of the remaining large business awards (($170.5 
billion-$39.2 billion-$131.3 billion) x 0.003 = $0.393 billion).
    SBA views the additional amount of projected contract activity as 
the potential amount of transfer from non-small to newly-designated 
small firms. This does not represent the creation of new contracting 
activity by the Federal government, merely a possible transfer or 
reallocation to different sized firms.
    Under the SBA's 7(a) Guaranteed Loan Program, SBA estimates that 
approximately $86.5 million in new Federal loan guarantees could be 
made to these newly-defined small businesses. In fiscal year 2004, 
small businesses received $12.5 billion in loan guarantees under the 
7(a) loan program in industries with a monetary-based size standard. 
Most of the newly-defined small businesses have 50 or more employees. 
SBA guaranteed 2,404 loans worth $1.1 billion to small businesses with 
50 or more employees. Based on an analysis of the Advocacy-Census 
Bureau data, only about 1.6 percent of businesses within the size range 
of the newly-defined small businesses participate in the 7(a) program. 
Assuming this level of participation, 186 additional loans could be 
guaranteed to the 11,600 newly defined businesses (11,600 x 0.016 = 
186). The value of these loans is estimated by applying the average 
size loan to small businesses with 50 or more employees of $465,000 to 
the number of additional loans ($465,000 x 186 = $86,490).
    The newly defined small businesses would also benefit from SBA's 
Economic Injury Disaster Loan (EIDL) Program. Since this program is 
contingent upon the occurrence and severity of a disaster, no 
meaningful estimate of benefits can be projected for future disasters.
    To the extent that up to 11,600 additional firms could become 
active in Federal small business programs, this may entail some 
additional administrative costs to the Federal Government associated 
with additional bidders for Federal small business procurement 
programs, additional firms seeking SBA-guaranteed lending programs, and 
additional firms eligible for enrollment in Central Contractor 
Registration's Dynamic Small Business Search database. Among businesses 
in this group seeking SBA assistance, there could be some additional 
costs associated with compliance and verification of small business 
status and protests of small business status. These costs are likely to 
generate minimal incremental administrative costs since mechanisms are 
currently in place to handle these administrative requirements.
    The costs to the Federal Government may be higher on some Federal 
contracts as a result of this rule. SBA believes, however, that there 
will be only minor distributional effects among large and small 
businesses relating to Federal procurement.
    The increase in the number of newly eligible small businesses is 
not enough to significantly affect current small businesses. Moreover, 
with a small amount of estimated lending to the newly defined small 
businesses as discussed above, it is unlikely that currently-defined 
small businesses would be denied SBA financial assistance due to a 
larger pool of eligible small businesses. These additional loan 
guarantees totaling $86.5 million or less will have virtually no impact 
on the overall availability of loans for SBA's financial assistance 
programs, which guaranteed about 88,000 loans totaling more than $17 
billion in fiscal year 2004.
    The revision to the current monetary-based size standard is 
consistent with SBA's statutory mandate to assist small business. This 
regulatory action promotes the Administration's objectives. One of 
SBA's goals in support of the Administration's objectives is to help 
individual small businesses succeed through fair and equitable access 
to capital and credit, government contracts, and management and 
technical assistance. Reviewing and modifying size standards where 
appropriate, including periodic inflation adjustments, ensures that 
intended beneficiaries have access to small business programs designed 
to assist them. Size standards do not interfere with State, local, and 
tribal governments in the exercise of their government functions. In a 
few cases, state and local governments have voluntarily adopted SBA's 
size standards for their programs to eliminate the need to establish an 
administrative mechanism to develop their own size standards.
    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.
    This regulation would 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 responsibility among the 
various levels of government. Therefore, under Executive Order 13132, 
SBA determines that this rule does not have sufficient federalism 
implications to warrant the preparation of a federalism assessment.
    SBA has determined that this rule does not impose any new 
information collection requirements under the Paperwork Reduction Act 
of 1980, 44 U.S.C. 3501-3520.
    Under the Regulatory Flexibility Act (RFA), an inflation adjustment 
to monetary-based size standards as a result of this rule may have a 
significant economic impact on a substantial number of small entities. 
SBA does not expect that the implementation of a two-step process to 
determine small business eligibility for its financial assistance 
program will have a significant economic impact of a

[[Page 72582]]

substantial number of small businesses. As discussed in the Regulatory 
Impact Analysis, the vast majority of 7(a) loans are made to small 
businesses well below the size standard, and they usually do not have 
complicated organizational structures. However, the provision is 
important to equitably evaluate the small business status of some 
applicants that do have affiliates that operate in various industries. 
Immediately below, SBA sets forth an initial regulatory flexibility 
analysis (IRFA) of the inflation adjustment to size standards 
addressing the reasons for promulgating the rule and its objectives of 
the rule; SBA's descriptions and estimate of the number of small 
entities to which the rule will apply; the projected reporting 
recordkeeping and other compliance requirements of the rule; the 
relevant Federal rules which may duplicate, overlap or conflict with 
the rule; and alternatives considered by SBA.
(1) What is the reason for this action?
    As discussed in the supplemental information, the purpose of this 
rule is to restore the small business eligibility of businesses that 
have grown above the size standard due to inflation rather than due to 
increased business activity. A review of the latest inflation indexes 
indicates that inflation has increased a sufficient amount to warrant 
an increase to the current monetary-based size standards.
(2) What are the objectives and legal basis for the rule?
    The revision to the monetary-based size standards for inflation 
more appropriately defines the size of businesses. This rule merely 
restores small business eligibility in real terms. Section 3(a) of the 
Small Business Act (15 U.S.C. 632(a)) gives SBA the authority to 
establish and change size standards. Within its administrative 
discretion, SBA implemented a policy in its regulations to review the 
effect of inflation on size standards at least every five years (13 CFR 
121.102(c)) and make any changes as appropriate.
(3) What is SBA's description and estimate of the number of small 
entities to which the rule will apply?
    SBA estimates that there will be approximately 11,600 newly 
designated small businesses, distributed as follows by NAICS Sector:

------------------------------------------------------------------------
                                                               Number of
           Sector                     Name of sector             firms
------------------------------------------------------------------------
11..........................  Agriculture...................          59
21..........................  Mining........................         672
23..........................  Construction..................         285
44-45.......................  Retail Trade..................       2,159
48-49.......................  Transportation................         211
51..........................  Information...................          89
52..........................  Finance and Insurance.........         520
53..........................  Real Estate...................       1,846
54..........................  Professional Services.........       2,674
56..........................  Administration and Support....         472
61..........................  Educational Services..........         201
62..........................  Health Care...................       1,171
71..........................  Arts, Entertainment and                184
                               Recreation.
72..........................  Accommodation and Food                 420
                               Services.
81..........................  Other Services................         635
                                                             -----------
                               Total........................     11,598
------------------------------------------------------------------------
Source: U.S. Small Business Administration, Office of Advocacy, 2002
  data provided by the Statistics of U.S. Business Division of the U.S.
  Census Bureau.

    The percentage increase in the number of small businesses that will 
result from this rule, compared to the existing base of small 
businesses, is estimated to be about two-tenths of one percent. The 
special tabulation for the SBA's Office of Advocacy obtained from the 
Bureau of the Census reports 5,043,335 firms in the industries with 
monetary-based size standards. Within these industries, 96.0 percent of 
businesses are currently defined as small under the existing size 
standards. Under this rule, that percentage will increase to 96.2%. The 
percentage increase of annual sales attributed to these newly defined 
small businesses is likely to approximate 0.6 percent. Currently-
defined small businesses under monetary-based size standards generate 
25.7 percent of sales. Under this rule, the percentage of sales 
attributable to small businesses will increase to 26.4%.
(4) What are the potential benefits of the rule?
    The most significant benefit to small businesses obtaining small 
business status is their eligibility for Federal small business 
assistance programs. These include SBA's financial assistance programs 
and Federal procurement preference programs for small business, 8(a) 
firms, small disadvantaged businesses, and small businesses located in 
historically underutilized business zones (HUBZone).
(5) Will this rule impose any additional reporting or recordkeeping 
requirements on small businesses?
    This rule does not impose any new information collection 
requirements from SBA which require approval by OMB under the Paperwork 
Reduction Act of 1980, 44 U.S.C. 3501-3520. A new size standard does 
not impose any additional reporting, record keeping or compliance 
requirements on small entities. Increasing size standards expands 
access to SBA programs that assist small businesses, but does not 
impose a regulatory burden as they neither regulate nor control 
business behavior.
(6) What are the relevant Federal rules which may duplicate, overlap or 
conflict with this rule?
    This rule overlaps with other Federal rules that use SBA's size 
standards to define a small business. Under Sec.  3(a)(2)(C) of the 
Small Business Act, unless specifically authorized by statute, Federal 
agencies must use SBA's size standards to define a small business. In 
1995, SBA published in the Federal Register a list of statutory and 
regulatory size standards that identified the application of SBA's size 
standards as well as other size standards used by Federal agencies (60 
FR 57988-57991, dated November 24, 1995). SBA is not aware of any 
Federal rule that would duplicate or conflict with establishing size 
standards.
    SBA cannot estimate the impact of a size standard change on each 
and every Federal program that uses its size standards. In cases where 
a size standard is not appropriate, the Small Business Act and SBA's 
regulations allow Federal agencies to develop different size standards 
with the approval of the SBA Administrator (13 CFR 121.902). For 
purposes of a regulatory flexibility analysis, agencies must consult 
with SBA's Office of Advocacy when developing different size standards 
for their programs.
(7) What alternatives did SBA consider?
    SBA considered two alternatives to this rule. First, SBA considered 
waiting until price levels increased by a greater amount before 
proposing an adjustment to its receipt-based size standards. Previous 
inflation adjustments ranged between 16 percent and 100 percent, 
whereas this increase is 8.7 percent. However, SBA now believes that 
more frequent adjustments are necessary since smaller amounts of 
inflation can change the eligibility of significant number of 
businesses.
    Second, SBA considered waiting until its review of issues that were 
raised in the Agency's Advance Notice of Proposed Rulemaking of 
December 3, 2004 (69 FR 70197) was completed. Ultimately, SBA rejected 
this approach as it could not predict with precision

[[Page 72583]]

the time for completion of its full review, the degree of inflation 
that could occur while the review was underway, or the final 
disposition of the issues that were raised in the December 3, 2004 
notice. SBA did not want to unnecessarily penalize firms during these 
deliberations.

List of Subjects

13 CFR Part 121

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

13 CFR Part 123

    Disaster assistance, Loan programs--business, Small business.


0
For the reasons set forth in the preamble, amend parts 121 and 123 of 
title 13 Code of Federal Regulations 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(a), 634(b) (6), 637(a), 644(c), and 
662(5); and Sec. 304, Pub. L. 103-403, 108 Stat. 4175, 4188.


0
2. Amend Sec.  121.201 by revising the size standards to the referenced 
NAICS Codes in the table ``SIZE STANDARDS BY NAICS INDUSTRY'' under 
sections 11, 21 through 23, 44-45, 48-49, 51 through 56, 61, 62, 71, 72 
and 81 and footnotes 9 and 15 to read as follows:


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

* * * * *

                                 Small Business Size Standards by NAICS Industry
----------------------------------------------------------------------------------------------------------------
                                                                               Size standards    Size standards
                NAICS codes                     NAICS U.S. industry title      in millions of     in number of
                                                                                   dollars          employees
----------------------------------------------------------------------------------------------------------------
                              Sector 11--Agriculture, Forestry, Fishing and Hunting
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
-------------------------------------------
                                        Subsector 112--Animal Production
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
112112....................................  Cattle Feedlots.................             $2.00  ................
 
                                                  * * * * * * *
112310....................................  Chicken Egg Production..........             $11.5  ................
 
                                                  * * * * * * *
-------------------------------------------
                                       Subsector 113--Forestry and Logging
----------------------------------------------------------------------------------------------------------------
113110....................................  Timber Tract Operations.........              $6.5  ................
113210....................................  Forest Nurseries and Gathering                $6.5  ................
                                             of Forest Products.
 
                                                  * * * * * * *
-------------------------------------------
                                  Subsector 114--Fishing, Hunting and Trapping
----------------------------------------------------------------------------------------------------------------
114111....................................  Finfish Fishing.................              $4.0  ................
114112....................................  Shellfish Fishing...............              $4.0  ................
114119....................................  Other Marine Fishing............              $4.0  ................
114210....................................  Hunting and Trapping............              $4.0  ................
-------------------------------------------
                         Subsector 115--Support Activities for Agriculture and Forestry
----------------------------------------------------------------------------------------------------------------
115111....................................  Cotton Ginning..................              $6.5  ................
115112....................................  Soil Preparation, Planting, and               $6.5  ................
                                             Cultivating.
115113....................................  Crop Harvesting, Primarily by                 $6.5  ................
                                             Machine.
115114....................................  Postharvest Crop Activities                   $6.5  ................
                                             (except Cotton Ginning).
115115....................................  Farm Labor Contractors and Crew               $6.5  ................
                                             Leaders.
115116....................................  Farm Management Services........              $6.5  ................
115210....................................  Support Activities for Animal                 $6.5  ................
                                             Production.
115310....................................  Support Activities for Forestry.              $6.5  ................
                  Except,                   Forest Fire Suppression \17\....        \17\ $16.5  ................
                  Except,                   Fuels Management Services \17\..        \17\ $16.5  ................
-------------------------------------------
                                                Sector 21--Mining
----------------------------------------------------------------------------------------------------------------
                                   Subsector 212--Mining (except Oil and Gas)
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
-------------------------------------------
                                  Subsector 213--Support Activities for Mining
----------------------------------------------------------------------------------------------------------------
 

[[Page 72584]]

 
                                                  * * * * * * *
213112....................................  Support Activities for Oil and                $6.5  ................
                                             Gas Operations.
213113....................................  Support Activities for Coal                   $6.5  ................
                                             Mining.
213114....................................  Support Activities for Metal                  $6.5  ................
                                             Mining.
213115....................................  Support Activities for                        $6.5  ................
                                             Nonmetallic Minerals (except
                                             Fuels).
-------------------------------------------
                                              Sector 22--Utilities
----------------------------------------------------------------------------------------------------------------
                                            Subsector 221--Utilities
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
221310....................................  Water Supply and Irrigation                   $6.5  ................
                                             Systems.
221320....................................  Sewage Treatment Facilities.....              $6.5  ................
221330....................................  Steam and Air-Conditioning                   $11.5  ................
                                             Supply.
-------------------------------------------
                                             Sector 23--Construction
----------------------------------------------------------------------------------------------------------------
                                    Subsector 236--Construction of Buildings
----------------------------------------------------------------------------------------------------------------
236115....................................  New Single-Family Housing                    $31.0  ................
                                             Construction (except Operative
                                             Builders).
236116....................................  New Multifamily Housing                      $31.0  ................
                                             Construction (except Operative
                                             Builders).
236117....................................  New Housing Operative Builders..             $31.0  ................
236118....................................  Residential Remodelers..........             $31.0  ................
236210....................................  Industrial Building Construction             $31.0  ................
236220....................................  Commercial and Institutional                 $31.0  ................
                                             Building Construction.
-------------------------------------------
                             Subsector 237--Heavy and Civil Engineering Construction
----------------------------------------------------------------------------------------------------------------
237110....................................  Water and Sewer Line and Related             $31.0  ................
                                             Structures Construction.
237120....................................  Oil and Gas Pipeline and Related             $31.0  ................
                                             Structures Construction.
237130....................................  Power and Communication Line and             $31.0  ................
                                             Related Structures Construction.
237210....................................  Land Subdivision................              $6.5  ................
237310....................................  Highway, Street, and Bridge                  $31.0  ................
                                             Construction.
237990....................................  Other Heavy and Civil                        $31.0  ................
                                             Engineering Construction.
                  Except,                   Dredging and Surface Cleanup             \2\ $18.5  ................
                                             Activities \2\.
-------------------------------------------
                                   Subsector 238--Specialty Trade Contractors
----------------------------------------------------------------------------------------------------------------
238110....................................  Poured Concrete Foundation and               $13.0  ................
                                             Structure Contractors.
238120....................................  Structural Steel and Precast                 $13.0  ................
                                             Concrete Contractors.
238130....................................  Framing Contractors.............             $13.0  ................
238140....................................  Masonry Contractors.............             $13.0  ................
238150....................................  Glass and Glazing Contractors...             $13.0  ................
238160....................................  Roofing Contractors.............             $13.0  ................
238170....................................  Siding Contractors..............             $13.0  ................
238190....................................  Other Foundation, Structure, and             $13.0  ................
                                             Building Exterior Contractors.
238210....................................  Electrical Contractors..........             $13.0  ................
238220....................................  Plumbing, Heating, and Air-                  $13.0  ................
                                             Conditioning Contractors.
238290....................................  Other Building Equipment                     $13.0  ................
                                             Contractors.
238310....................................  Drywall and Insulation                       $13.0  ................
                                             Contractors.
238320....................................  Painting and Wall Covering                   $13.0  ................
                                             Contractors.
238330....................................  Flooring Contractors............             $13.0  ................
238340....................................  Tile and Terrazzo Contractors...             $13.0  ................
238350....................................  Finish Carpentry Contractors....             $13.0  ................
238390....................................  Other Building Finishing                     $13.0  ................
                                             Contractors.
238910....................................  Site Preparation Contractors....             $13.0  ................
238990....................................  All Other Specialty Trade               \13\ $13.0  ................
                                             Contractors \13\.
238990....................................  Building and Property Specialty         \13\ $13.0  ................
                                             Trade Services \13\.
 
                                                  * * * * * * *
-------------------------------------------
                                           Sectors 44-45--Retail Trade
 (Not applicable to Government procurement of supplies. The nonmanufacturer size standard of 500 employees shall
                          be used for purposes of Government procurement of supplies.)
----------------------------------------------------------------------------------------------------------------
                                 Subsector 441--Motor Vehicle and Parts Dealers
----------------------------------------------------------------------------------------------------------------
441110....................................  New Car Dealers.................             $26.5  ................
441120....................................  Used Car Dealers................             $21.0  ................
441210....................................  Recreational Vehicle Dealers....              $6.5  ................

[[Page 72585]]

 
441221....................................  Motorcycle Dealers..............              $6.5  ................
441222....................................  Boat Dealers....................              $6.5  ................
441229....................................  All Other Motor Vehicle Dealers.              $6.5  ................
                  Except,                   Aircraft Dealers, Retail........              $9.0  ................
441310....................................  Automotive Parts and Accessories              $6.5  ................
                                             Stores.
441320....................................  Tire Dealers....................              $6.5  ................
-------------------------------------------
                              Subsector 442--Furniture and Home Furnishings Stores
----------------------------------------------------------------------------------------------------------------
442110....................................  Furniture Stores................              $6.5  ................
442210....................................  Floor Covering Stores...........              $6.5  ................
442291....................................  Window Treatment Stores.........              $6.5  ................
442299....................................  All Other Home Furnishings                    $6.5  ................
                                             Stores.
-------------------------------------------
                                 Subsector 443--Electronics and Appliance Stores
----------------------------------------------------------------------------------------------------------------
443111....................................  Household Appliance Stores......              $8.0  ................
443112....................................  Radio, Television and Other                   $8.0  ................
                                             Electronics Stores.
443120....................................  Computer and Software Stores....              $8.0  ................
443130....................................  Camera and Photographic Supplies              $6.5  ................
                                             Stores.
-------------------------------------------
                   Subsector 444--Building Material and Garden Equipment and Supplies Dealers
----------------------------------------------------------------------------------------------------------------
444110....................................  Home Centers....................              $6.5  ................
444120....................................  Paint and Wallpaper Stores......              $6.5  ................
444130....................................  Hardware Stores.................              $6.5  ................
444190....................................  Other Building Material Dealers.              $6.5  ................
444210....................................  Outdoor Power Equipment Stores..              $6.5  ................
444220....................................  Nursery and Garden Centers......              $6.5  ................
-------------------------------------------
                                     Subsector 445--Food and Beverage Stores
----------------------------------------------------------------------------------------------------------------
445110....................................  Supermarkets and Other Grocery               $25.0  ................
                                             (except Convenience) Stores.
445120....................................  Convenience Stores..............             $25.0  ................
445210....................................  Meat Markets....................              $6.5  ................
445220....................................  Fish and Seafood Markets........              $6.5  ................
445230....................................  Fruit and Vegetable Markets.....              $6.5  ................
445291....................................  Baked Goods Stores..............              $6.5  ................
445292....................................  Confectionery and Nut Stores....              $6.5  ................
445299....................................  All Other Specialty Food Stores.              $6.5  ................
445310....................................  Beer, Wi