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Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: October 2, 2002

SUBJECT: Small Business Administration; Small Business Size Standard for Tour Operators

SOURCE: Federal Register, October 2, 2002, Vol. 67, No. 191, page 61829

AGENCIES: Small Business Administration (SBA)

ACTION: Proposed Rule

SYNOPSIS: SBA is proposing to modify the way average annual receipts are calculated for firms in North American Industry Classification System (NAICS) 561520, Tour Operators. The proposed method would exclude funds received in trust for unaffiliated third parties from the calculation of a tour operator's receipts. SBA would retain the size standard of $6.0 million.

EDITOR'S NOTE: The SBA's regulations are in Title 13 of the Code of Federal Regulations (CFR). The SBA small business size regulations are in Chapter 1, Small Business Administration; Part 121, Small Business Size Regulations; Subpart A, Size Eligibility Provisions and Standards; Section 121.201, What size standards has SBA identified by North American Industry Classification System codes?

Effective February 22, 2002, the Tour Operators size standard was increased from $5,000,000 to $6,000,000 as part of a 15.8% inflation adjustment to SBA's monetary size standards. For more on the adjustment, see the January 23, 2002, FEDERAL CONTRACTS DISPATCH "Small Business Administration; Inflation Adjustment to Size Standards for Service Industries."

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

ADDRESSES: Send comments to Gary M. Jackson, Assistant Administrator for Size Standards, 409 3rd Street, SW, Mail Code 6530, Washington, DC 20416; or e-mail to SIZESTANDARDS@sba.gov.

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

SUPPLEMENTAL INFORMATION: SBA has received requests from tour operators to review the size standard for NAICS 561520, Tour Operators. They request that SBA exclude monies passed through to suppliers of travel components (that is, meals, transportation, lodging, and sightseeing and entertainment) from the calculation of a tour operator's average annual receipts. These monies typically account for 80% to 95% of a tour operator's receipts.

Section 121.104, How does SBA calculate annual receipts?, provides that the receipts of a firm are based on a firm's federal tax returns. Generally, receipts reported to the Internal Revenue Service (IRS) include a firm's gross receipts from the sale of goods and services. However, tour operators believe that receipts collected for payment to the actual transportation and lodging providers that are reimbursed by a tour operator should not be included in the calculation of average annual receipts for purposes of determining the size of a tour operator.

When reviewing such a request, SBA evaluates five industry characteristics under which it might be appropriate to exclude certain funds received and later transmitted to an unaffiliated third party:

  1. A broker or agent-like relationship exists between a firm and a third party provider which is a dominant or crucial activity of firms in the industry.

  2. The pass-through funds associated with the broker or agent-like relationship are a significant proportion of the firm's total receipts.

  3. Consistent with the normal business practice of firms in the industry, a firm's income after the pass-through funds are remitted to a third party is typically derived from a standard commission or fee.

  4. Firms in the industry do not normally consider billings that are reimbursed to other firms as their own income, preferring instead to count only receipts that are retained for their own use.

  5. Government agencies which engage in the collection of statistics and other industry analysts typically represent receipts of the industry's firms on an adjusted receipts basis.

Based on its evaluation of the tour operators industry, SBA agrees that certain types of receipts should be excluded from the calculation of size for firms in this industry. However, adoption of the changed definition of receipts would mean a firm with receipts, exclusive of pass-throughs to third parties, of $6.0 million would be equivalent to a firm with gross billings of $30 million (assuming 80% of billings are passed-through to third parties). Accordingly, SBA believes it is necessary to review the size standard along with its proposal to allow exclusions for pass-through funds.

Since 50% of industry receipts, excluding pass-through revenues, are earned by tour operators with gross receipts of $4.4 million or less, and 60% of industry receipts are earned by tour operators with gross receipts of $8.2 million or less, SBA believes the $6.0 million size standard is appropriate for the industry. SBA considered a $3.0 million size standard but rejected it as too low when compared to similar industries, such as the freight transportation arragement industry. Therefore, SBA is proposing a revision to the size standard for the tour operators industry by excluding funds received in trust for unaffiliated third parties while retaining the size standard of $6.0 million in average annual receipts. SBA would do this by adding footnote 10 to NAICS 561520 and its $6.0 million size standard in the Section 121.201 small business size standard table. Footnote 10 would be revised to state, "NAICS codes 488510 (part), 531210, 541810, 561510, 561520, and 561920 -- as measured by total revenues, but excluding funds received in trust for an unaffiliated third party, such as bookings or sales subject to commissions. The commissions received are included as revenues."

Currently, 2,722 out of 3,222 tour operators are considered small. If this change is adopted, 238 additional firms, generating 21% of sales in the industry, will obtain small business status and become eligible for small business assistance programs.

SBA is seeking public comments on this proposed size standard for the tour operators industry. Comments on alternatives, such as the $3.0 million size standard excluding pass-through revenues or retaining the current $6.0 million size standard including pass-through revenue, should present the reasons that would make them preferable to the size standard.

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

Copyright 2002 by Panoptic Enterprises. All Rights Reserved.

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