Alert! SBA OHA Decides 3-Year Receipts Calculation Period Still Applies

Since being passed by Congress in late 2018, the Runway Extension Act has been the source of great confusion among small business contractors: would size under receipts-based NAICS codes be calculated under the 3-year calculation period set out in the SBA’s regulations, or under the new 5-year calculation period mandated by Congress?

In a decision just publicly released, the SBA Office of Hearings and Appeals has weighed in. As of now, the SBA will still calculate size under the 3-year calculation period.

The applicability of the Runway Extension Act was debated in Cypher Analytics, Inc. dba Crown Point Systems, SBA No. SIZ-6022 (Aug. 27, 2019). In that case, Cypher Analytics was found to be other than small under NAICS code 541611 after the SBA applied a 3-year calculation period.

Cypher Analytics appealed to the OHA, arguing that the SBA erred by not applying the 5-year calculation period required under the Runway Extension Act. Had it, the SBA would have found Cypher to be a small business.

[Author’s note: before proceeding with our discussion, it’s worth disclosing that Koprince Law LLC represented Cypher Analytics in this matter. It’s not our regular practice to write about cases in which we were involved; we’ve done so here (with Cypher’s permission) given the importance of this issue to the government contracting community.]

Arguments in the appeal followed those we’ve tracked (and contributed to) on SmallGovCon. Cypher Analytics’ appeal first argued that the Runway Extension Act was immediately effective because it didn’t specify any other effective date. And because a statute trumps an inconsistent regulation, the appeal said that the Runway Extension Act’s designation of a 5-year receipts calculation period should control over the SBA’s regulations.

The SBA responded to the appeal. This was a bit unusual—the SBA doesn’t often respond to size appeals, so the fact that it did so here indicates the importance of the issue. And in that response, the SBA argued that it needed to update its regulations for the 5-year change to become effective. To support this point, the SBA pointed to the Small Business Act itself, which requires formal rulemaking for any changes to a size standard.

Replying to this argument, Cypher Analytics argued that “Congress immediately changed the size standard receipts calculation period when it passed the Runway Extension Act.” The SBA’s rules can’t conflict with their underlying statute, so Congress’s decision to change the calculation period alleviated any need to go through the formal rulemaking process.

Having considered these arguments, the OHA was unpersuaded that the 5-year calculation period should apply. Its decision was based on two primary reasons:

First, that the portion of the Small Business Act amended by the Runway Extension Act applies to the promulgation of size standards. Here, though, the SBA was simply applying an already-existing size standard. Thus, the OHA was not convinced “that the Runway Extension Act directly contradicts” the applicable regulations relating to the period of measurement used to determine size.  

Second, the OHA noted that the Small Business Act (as amended by the Runway Extension Act) requires formal rulemaking before a size standard is established. “Accordingly,” the OHA noted, “insofar as the Runway Extension Act can be understood as lengthening the time period used to calculate the size of individual businesses, such a change would have occurred in the context of a revision to the size standard methodology, and therefore could be implemented only through notice-and-comment rulemaking and with approval of the SBA Administrator.” Thus, the SBA “could reasonably conclude” that the effectiveness of the Runway Extension Act first depends on notice-and-comment rulemaking.

The OHA denied the appeal and, in doing so, affirmed the applicability of a 3-year receipts calculation period.

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I’ll admit it: this post is painful to write. We were unsuccessful in this appeal, having advanced some of the arguments we’ve raised on SmallGovCon about the Runway Extension Act’s applicability.

But as my colleagues might tell you, I’m stubborn. So notwithstanding the OHA’s decision, I still think the Runway Extension Act should have been given immediate effect. As amended, the Small Business Act prohibits any Federal department or agency from prescribing a size standard that calculates a firm’s receipts over a period of less than 5 years. Here, Congress mandated the change to 5 years, so I don’t see why the SBA would need to update its (now inconsistent) regulations for that mandate to apply.

Consider the logical consequence of the SBA’s position. If the amended portion of the Small Business Act first requires formal rulemaking before changing the size standards, then what would prevent the SBA from not changing the size standard at all? That is, can the SBA avoid the 5-year calculation period simply by not implementing a new rule?

I doubt it. Congress is already miffed at the SBA’s delayed implementation of the 5-year calculation period, so there’s little reason to believe Congress would be impressed with the suggestion that the SBA might avoid the Runway Extension Act entirely.

Notwithstanding my continued grumblings about the SBA’s failure to give the Runway Extension Act immediate effect, the fact is that the OHA has decided that the 3-year receipts calculation period continues to apply.

As we’ve noted, the SBA has issued a proposed rule to implement the 5-year calculation period mandated by Congress; hopefully that will become effective by the end of the calendar year. We’ll update SmallGovCon readers once it does. In the meantime, please let me know if you have any questions about size calculations.