What Is a NAICS Code?
Some states require that business entities provide a “NAICS code” when filing their annual report with the secretary of state or similar regulator. Tennessee, for example, requires that domestic and foreign corporations and limited liability companies file annual reports.[1] The online report has a field to enter the NAICS code for the submitting entity. The report cannot be filed unless that field is completed it is used strictly for internal and statistical purposes. There is no penalty or consequence if the NAICS code is incorrect in the report.
So, what is a NAICS code? “NAICS” stands for North American Industry Classification System.[2] NAICS is “an industry classification system that groups establishments into industries based on the similarity of their production processes. It is a comprehensive system covering all economic activities.”[3] The purpose of NAICS is to “facilitate[] the collection, tabulation, presentation, and analysis of data relating to establishments[[4]] and ensure[] that” such data are uniform and comparable among the United States, Canada, and Mexico, which collaborate with the United States in creating and updating NAICS.[5] NAICS was first implemented in the United States in 1997 to replace a prior industry classification system and is updated every five years.[6] The latest U.S. version of NAICS was released by the Office of Management and Budget in 2022.[7]
NAICS’s structure is “‘hierarchical,’ grouping economic activities into twenty broad sectors, various subsectors, numerous industry groups, and 1,012 individual industries.”[8] The NAICS code is a six-digit code used to identify industries and their placement in this hierarchical structure.[9] “The first two digits of the code designate the sector, the third digit designates the subsector, the fourth digit designates the industry group, the fifth digit designates the NAICS industry, and the sixth digit designates the national industry.”[10] The first two digits thus designate the NAICS sectors that represent the most general categories of economic activities.[11]
For example, the two-digit code 71 is for the “Arts, Entertainment, and Recreation” sector.[12] The activities of this sector are “operating or providing services to meet varied cultural, entertainment, and recreational interests of their patrons.”[13] This sector is then divided into three subsectors: “Performing Arts, Spectator Sports, and Related Industries,” having the digit 1, so that the first three digits of the NAICS code are 711; “Museums, Historical Sites, and Similar Institutions,” having the digit 2, so the first three digits of the NAICS code are 712; and “Amusement, Gambling, and Recreation Industries,” having the digit 3, so the first three digits of the NAICS code are 713.[14] Subsectors are then broken down into industry groups. For example, the “Performing Arts, Spectator Sports, and Related Industries” subsector includes five industry groups — “Performing Arts,” “Spectator Sports,” “Performing Arts Companies,” “Promoters of Performing Arts, Sports, and Similar Events,” “Agents and Managers for Artists, Athletes, Entertainers, and Other Public Figures,” and “Independent Artists, Writers, and Performers” — having the fourth digits of the NAICS code 1 through 5, respectively.[15] Finally, the industry groups are further subdivided into the NAICS industries. For example, the “Performing Arts Companies” industry group includes, among other industries, the individual industry “Musical Groups and Artists,” having the six-digit NAICS code 711130.[16]
There is a detailed description in the NAICS Manual for each sector, subsector, industry group, and NAICS industry. For example, the industry “Musical Groups and Artists” comprises “(1) groups primarily engaged in producing live musical entertainment (except theatrical musical or opera productions) and (2) independent (i.e., freelance) artists primarily engaged in providing live musical entertainment. Musical groups and artists may perform in front of a live audience or in a studio, and may or may not operate their own facilities for staging their shows.”[17] The NAICS Manual provides illustrative examples of establishments fitting the described industry, as well as cross-references to similar industries that are covered by a different NAICS code. Illustrative examples of “Musical Groups and Artists” include “bands,” “musical groups (except theatrical musical groups),” “orchestras,” and “independent musicians or vocalists,” while “[f]reelance producers, song writers, composers, music arrangers, and directors (except musical groups and artists) primarily engaged in musical activities independent of a company or group are classified” in NAICS code 711510, which is for the “Independent Artists, Writers, and Performers” industry.[18]
There is obviously a fair amount of detail involved, and it can be tricky to pick the right NAICS code for a particular establishment. The NAICS Manual gives the following minimally helpful instructions for determining the correct NAICS code for one’s business: “[F]irst identify the primary business activity. Then refer either to: 1) the NAICS United States Structure to search the titles from the 2-digit level down through the 6-digit, more detailed level, to find the appropriate code; or 2) the Alphabetic Index to search alphabetically for the primary activity and its corresponding code. Next, read the full description of the industry (including the narrative, cross-references, and illustrative examples), and determine if that description fits the primary business activity of your establishment.”[19] The NAICS Manual also provides a link to an electronic search and references at the U.S. Census Bureau website: www.census.gov/naics/.[20]
A business does not “apply” for a NAICS code, and “[t]here is no central government agency with the role of assigning, monitoring, or approving NAICS codes for establishments.”[21] Rather, “statistical agencies generally assign NAICS codes based on information provided by a business on an application form, an administrative report, or on a survey or census report form.”[22] Each agency uses its own methods for assigning NAICS codes to the establishments on their lists.[23] For example, the Social Security Administration assigns a NAICS code to a new business based on the information provided in its application for an Employer Identification Number; the Census Bureau generally assigns a NAICS code to a business based on information provided by the business in a survey or census report form; and the Bureau of Labor Statistics initially assigns a NAICS code based on business activity information provided in an application for unemployment insurance.[24]
As noted, the NAICS categories and definitions were developed for statistical purposes and not “to meet the needs of procurement and/or regulatory applications.”[25] Even so, the classifications and associated NAICS codes have been adopted by other federal agencies and used for “various administrative, regulatory, and taxation purposes.”[26] As such, it can be important for a business to ensure that the correct NAICS code has been assigned in connection with a particular project.
A good example of this arises in the procurement of government contracts. Under the Small Business Act, certain government contracts are set aside for the benefit of small business concerns.[27] The policies of the Small Business Act are carried out by the U.S. Small Business Administration (“SBA”), which uses NAICS codes to determine which entities qualify as small business concerns by assigning “size standards” for specific industries.[28] The SBA’s size standards “define whether a business entity is small and, thus, eligible for Government programs and preferences reserved for ‘small business’ concerns.”[29] Under the SBA’s regulations, “[t]he procuring agency contracting officer, or authorized representative, designates the proper NAICS code and corresponding size standard in a solicitation, selecting the single NAICS code which best describes the principal purpose of the product or service being acquired.”[30] The NAICS code assigned to a particular solicitation thus “limits the small businesses that may submit bids to those that qualify under the size standard associated with that particular NAICS code.”[31] In other words, if the procuring agency’s contracting officer assigns the wrong NAICS code to a particular procurement, then a business that is not in the industry corresponding to the assigned NAICS code will lose out on the ability to bid for that contract. By regulation, the contracting officer’s choice of NAICS code and the corresponding size standard is final unless timely appealed to the SBA’s Office of Hearing and Appeals (“OHA”).[32] An unfavorable decision by the OHA can then be appealed to a United States District Court.[33] Because of the importance of the NAICS code in applying for government set asides, appeals of a contracting officer’s assignment of a NAICS code are not that infrequent in the procurement world.
[1]See Tenn. Code Ann. §§ 48-26-203 (corporations), 48-228-203 (limited liability companies).
[2]See Exec. Office of the President, Office of Mgmt. & Budget, North American Industry Classification System: United States, 2022, at 1 [hereinafter NAICS Manual].
[3]Id. at 14; accord Consol. Safety Servs. v. United States, 167 Fed. Cl. 543, 547 (2023).
[4]An “establishment” is defined as “the smallest operating entity for which records provide information on the cost of resources—materials, labor, and capital—employed to produce the units of output.” It is “generally a single physical location where business is conducted or where services or industrial operations are performed (for example, a factory, mill, store, hotel, movie theater, mine, farm, airline terminal, sales office, warehouse, or central administrative office).” NAICS Manual, at 18.
[5]Id. at 14.
[6]See id. at 13, 74; Consol. Safety Servs., 167 Fed. Cl. at 547.
[7]See Consol. Safety Servs., 167 Fed. Cl. at 547.
[8]Id. (citing NAICS Manual, at 14, 16).
[9]NAICS Manual, at 18.
[10]Id.
[11]Id. at 16.
[12]Id. at 17.
[13]Id.
[14]Id. at 66-68.
[15]Id. at 66-67.
[16]Id. at 66.
[17]Id. at 543.
[18]Id.
[19]Id. at 73.
[20]Id.
[21]Id.
[22]Id.
[23]Id.
[24]Id.
[25]Id. at 74.
[26]Consol. Safety Servs., 167 Fed. Cl. at 547 (quoting NAICS Manual, at 14); see also NAICS Manual, at 74 (“other federal agencies and other organizations have adopted NAICS for procurement and regulatory purposes even though it does not entirely fit their specific needs”).
[27]See Palladian Partners, Inc. v. United States, 783 F.3d 1243, 1247 (Fed. Cir. 2015).
[28]See id.; Consol. Safety Servs., 167 Fed. Cl. at 547 (quoting 13 C.F.R. § 121.101(a)).
[29]13 C.F.R. § 121.101(a).
[31]Palladian Partners, 783 F.3d at 1247.
[32]Id. § 121.402(d)
[33]See Palladian Partners, 783 F.3d at 1254; Consol. Safety Servs., 167 Fed. Cl. at 553.