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TITLE 2.
DEPARTMENT OF GENERAL SERVICES
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INITIAL STATEMENT OF REASONS
SECTION 1896.4(q). DEFINITION OF MICROBUSINESS
SPECIFIC PURPOSE OF THE REGULATION.
The proposed regulation will amend the definition of microbusiness that currently includes the average annual gross receipts limit of $2.5 million so that it will match the microbusiness limit proposed in §1896.12 Eligibility for Certification as a Small Business of $2.75 million. No change is required to the definition of small business in §1896.4.
Government Code section 14837, subdivision (d)(3) requires the Director of the Department of General Services (DGS) to biennially review the average annual gross receipts levels and adjust them based on the California Consumer Price Index.
Additionally the proposed regulation amendment removes the Title 13 Code of Federal Regulations reference that is no longer a valid reference since both the California and the Federal small business programs changed and they do not match each other.
NECESSITY.
Consistency with §1896.12.
TECHNICAL, THEORETICAL, AND/OR EMPIRICAL STUDY, REPORTS, OR DOCUMENTS.
Escalation Analysis (Consumer Price Index)
Procurement Division's Procedure for Price Analysis
ALTERNATIVES TO THE PROPOSED REGULATORY ACTION THAT WOULD BE AS EFFECTIVE AND LESS BURDENSOME TO PRIVATE PERSONS.
None
ALTERNATIVES TO THE PROPOSED REGULATORY ACTION THAT WOULD LESSEN ANY ADVERSE ECONOMIC IMPACT ON SMALL BUSINESS.
None
EVIDENCE SUPPORTING FINDING OF NO SIGNIFICANT ADVERSE ECONOMIC IMPACT ON ANY BUSINESS.
The increase in the average annual gross receipt dollar limits that represent the microbusiness definition has no adverse economic impact on any business. This is because the microbusiness definition provides no benefit that is not also provided as part of small business and the business would still be defined as small business.
SECTION 1896.12. ELIGIBILITY FOR CERTIFICATION AS A SMALL BUSINESS
SPECIFIC PURPOSE OF THE REGULATION.
Government Code section 14837, subdivision (d)(3) requires the Director of the Department of General Services (DGS) to biennially review the average annual gross receipts limits and allows adjustment based on the California Consumer Price Index.
The purpose of this statute was to allow the Director of DGS to address the effect that inflation alone has on the definition of small business and microbusiness so that the value of the certification in State procurement could remain constant. This amendment to the regulation will administratively accomplish this goal.
Government Code section 14837 defines small business in subsection (d)(1) and establishes the size limit based on average annual gross receipts of $10 million. Microbusiness is defined in subdivision (d)(2) with an average annual gross receipts size limit of $2.5 million.
The purpose of the proposed regulation is to increase the average annual gross receipt dollar limits that represent small business and microbusiness to $12 million and $2.75 million respectively. This increase is based upon the California Consumer Price Index (CCPI) for "all urban consumers" as required by Government Code section 14837.
Additionally the proposed regulation amendment removes the Title 13 Code of Federal Regulations references that are no longer valid references since both the California and the Federal small business programs changed and they do not match each other.
NECESSITY.
The amendments are necessary to address the impact of inflation since 1999 for small business and since 2002 for microbusiness by specifying the increase in the average annual gross receipt limits.
Prior to 1999, California had different industry standards for about 20 industries. In 1999, the Legislature standardized the definition of small business. In 2002, the Legislature created a subcategory of small business called microbusiness. There has not been an increase in the gross annual receipt limits since the baseline periods of 1999 and 2002, the years the statutes were enacted for small business and microbusiness.
The DGS performed an escalation analysis. The analysis uses the CCPI for "all urban consumers" to apply to the broad spectrum of business seen in California. The baseline period used for the comparison was the "annual" inflation factor of the year each statute was enacted:
- For small business, the baseline period is 1999; and
- For microbusiness, the baseline period is 2002.
The analysis uses an escalation formula that is in Procurement Division's procedure for price analysis established in 1997. The price analysis is modeled after common industry practices, including those used by the federal government. The escalation formula considers the effect of inflation or deflation over a particular period of time. The calculation was performed initially in August 2005. The formula to determine the current value of the average annual receipts as impacted by actual inflation in California is as follows:
- "New index amount" divided by "old index amount" equals escalation factor
- "Old dollar amount" multiplied by the escalation factor equals escalated dollar amount
The escalation factor calculations are as follows:
Small Business
The new index amount *of 203.5 (August 2005 base) is divided by the old index amount* of 168.5 (1999 base) to create the escalation factor (1.2077). Then, the old dollar amount of $10 million is multiplied by the escalation factor of 1.2077 to equal the escalated dollar amount of $12,066,151. The escalated dollar amount recommendation is $12 million.
* Source: California Consumer Price Index
Microbusiness
The new index amount* of 203.5 (August 2005 base) is divided by the old index amount* of 186.1 (2002 base) to create the escalation factor (1.9035). Then, the old dollar amount of $2.5 million is multiplied by the escalation factor of 1.9035 to equal the escalated dollar amount of $2,733,745. The escalated dollar amount recommendation is $2.75 million.
* Source: California Consumer Price Index
The public condition addressed by this regulation is that the price of doing business has increased since the average annual gross receipts limits were established. Therefore, some businesses that have continued the same operations may find that through the economic effect of inflation, their cost of doing business and their sales receipts are no longer within the small business definition; however their businesses have not changed. One example is a trucking business that experienced increased costs due to higher fuel costs. When that cost was passed on to the customer, the average annual gross receipts level was increased to make them no longer a certified small business due to the State's dated annual gross receipts limit.
TECHNICAL, THEORETICAL, AND/OR EMPIRICAL STUDY, REPORTS, OR DOCUMENTS.
Escalation Analysis (Consumer Price Index)
Procurements Division's Procedure for Price Analysis (1997)
ALTERNATIVES TO THE PROPOSED REGULATORY ACTION THAT WOULD BE AS EFFECTIVE AND LESS BURDENSOME TO PRIVATE PERSONS.
None
ALTERNATIVES TO THE PROPOSED REGULATORY ACTION THAT WOULD LESSEN ANY ADVERSE ECONOMIC IMPACT ON SMALL BUSINESS.
None
EVIDENCE SUPPORTING FINDING OF NO SIGNIFICANT ADVERSE ECONOMIC IMPACT ON ANY BUSINESS.
Raising the average annual gross receipt dollar limits that represent small business to $12 million may create minor growth of small business jobs to perform more State contracts. Some of these businesses that receive the small business certification under the increased limit may receive a five percent State contracting preference and gain the State business in place of another non-small business. There will be no significant economic impact on business since there will be no increase or decrease in business just a redirection. |
