Federal VARs Fighting Back

Small VARs serving the federal market are fighting mad.

The Small Business Administration is looking at removing a footnote from the North American Industry Classification System's Code 541519 exception for IT resellers competing for federal contracts that designates a small business as 150 employees or fewer. Instead, a small business would be classified as $27.5 million in revenue or less, a cutoff that is currently part of the code but is an alternative to the 150-employee limit. The change would help simplify and provide consistency in the codes, according to SBA officials.

Small VARs that CRN spoke with said that, if the change goes through, they expect to lose millions and potentially even go out of business as the new cutoff would pit them directly against giant companies such as CDW, Hewlett-Packard and IBM in the federal space. Right now, VARs with fewer than 150 employees get benefits as small businesses that allow them to compete better for contracts.

[Related: Small VARs Bet Big On Federal Contracts]

To fight to keep the 150-employee cutoff exception in place, federal VARs are stepping up on a variety of fronts.

A coalition of small VARs called the Value Added Reseller Consortium (VARC) launched a petition to save the footnote. The petition outlines how removing the footnote would force small VARs to compete directly against large companies, including those on the Fortune 500, and will cause many small businesses to close and employees to lose their jobs. The group needs to get 100,000 signatures in less than 30 days to elicit a response from the White House.

"Many of these small VARs have outgrown that revenue standard threshold and, without enjoying the 150-employee size standard, many of these small VARs are going to be put out of business," said Jim Fontana, partner at Dempsey Fontana, the Reston, Va.-based law firm that helped create the consortium. "The consensus among even more than the 13 [in the consortium] is that it would put a great many of them at a severe competitive disadvantage by having to rely only on the revenue-based size standard."

The same group also has launched a letter-writing campaign and #SaveFootnote18 Twitter hashtag to Congress to help spread the word of how they think removing the exception would affect small businesses. At the time of publication, they had already sent more than 285 letters to members of Congress.

VARs said they are also sending their comments directly to the government about the proposed regulation change. Comments on the 541519 rule are being accepted until Nov. 10.

If the exception were removed, groups such as the American Small Business League (ASBL), an advocacy group for small businesses that has been fighting hard to keep the exception in place, plans to file an injunction, ASBL President Lloyd Chapman told CRN.

The group has to wait until the final rule is issued to file the injunction, but Chapman said that the group is already planning just in case. He said that the injunction will be based on a number of factors, in particular the SBA's assertion that VARs won't be affected because 150 employees is essentially equivalent to $27.5 million in revenue. However, Chapman said that in the federal space VARs usually do around $2 million to $3 million in revenue per employee, making that estimate fall short.

"If you made $27.5 million in revenue and had 150 employees, you wouldn't last 15 minutes," Chapman said. "That's sort of the heart of the whole thing here."

Next: Where's The Data?

The SBA told CRN that it was using the most up-to-date data from the 2007 census and didn't believe changing the rule would affect small businesses, though it said it had no data to show how many businesses were using the exception.

Carly Goldstein, vice president at Santa Fe, N.M.-based Wildflower International, said that she thinks the federal government would change its mind on removing the exception if it truly understood the impact and based its decisions on real data.

"This claim of theirs that is backed up by nothing. We, as a group, our data is current. I know what it costs to run a small business. There are companies like ours that do this small thing really, really well all over the government and that is important data," Goldstein said.

Augie Riolo, president at Virginia Beach, Va.-based Knowledge Information Systems, is one of the members of the consortium actively fighting the footnote removal.

"We think it's serious because this footnote is key to an IT VAR in the federal government. If it is removed, we don't know what the remedy is. They have not explained what the remedy is. As businessmen, we're not interested in not knowing what's going on," Riolo said.

Riolo said he is optimistic that the consortium will be able to show the federal government the dire effects removing the exception might have on small VARs, but worries it might not fully understand the business model.

"We're hopeful that [we will] be able to shed some light on that, but what we fear is that we're speaking with bureaucrats and not with businesspeople. The results from a bureaucratic point of view could be different than a small business," he said.

This article originally appeared as an exclusive on the CRN Tech News App for iOS and Windows 8.