Q: Our agency does about $25 million in annual sales. We have been approached by a large corporation to handle its employee travel. The corporation has federal government contracts that require subcontracting goals, so it is looking for small-business subcontractors. However, according to the corporation, the Small Business Administration's (SBA) size standard for travel agencies is $3.5 million, which makes us over seven times too large to be a small business. Is this correct, or do we qualify as a small business?
Also, the corporation not only needs to use small-business subcontractors but also needs to fulfill subcontracting dollar goals. Its goal is to use small-business subcontractors for $5 million worth of subcontracting volume, and they have asked us if they can count all of its $5 million in airline ticket volume that goes through us. Can they?
A: The $3.5 million figure applies to your agency's commissions and fees only, so you probably qualify as a small business. Whether the corporation chooses to report that it has done $5 million worth of small-business subcontracting through you is up to the corporation to decide, based on the advice of its own lawyers, and you should not be providing legal advice to the corporation about that question.
As to the $3.5 million standard, I have often been surprised at how few procurement officials at major government contractors know that the correct measurement is commissions and fees, not sales volume.
The SBA's regulation that sets forth the size standard for travel agencies states that the standard is $3.5 million in average annual "receipts" for the last three fiscal years. In a footnote, the SBA states that receipts are "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."
Another SBA regulation provides more clarity: "Receipts do not include net capital gains or losses; taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees; proceeds from transactions between a concern and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker."
In other words, when a travel agent collects $400 for an airline ticket and $25 for a service fee, the $400 is clearly "an amount collected for another," namely, the airline. The agency's "receipts" are just $25.
In travel agency accounting, "receipts" translate to commissions and fees or "gross profits" before expenses. If you have had about $25 million in sales each year for the last three years, your commissions and fees are probably $2.5 million or less per year, so your agency qualifies as a small business under SBA standards if the rules' other requirements are met.
The SBA is considering raising the size standard from $3.5 million to $19 million, which would mean that all but the very largest agencies would qualify as small businesses. The SBA is also considering whether the measurement should continue to be "receipts." However, there is no indication of when, if ever, the SBA will make up its mind.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].