Naics code

What Is NAICS Code?

The North American Industry Classification System (NAICS) code is a standardized six-digit numerical system used by federal statistical agencies in the United States, Canada, and Mexico to classify business establishments by their primary type of economic activity⁷⁷. This system is a core component of economic classification, enabling the consistent collection, analysis, and publication of statistical data related to the North American business economy⁷⁵, ⁷⁶. Businesses utilize NAICS codes for various purposes, including facilitating market research, securing government contracts, and identifying eligibility for certain tax incentives⁷³, ⁷⁴. The NAICS code helps define a business's operational area, which is crucial for comprehensive statistical analysis across different sectors⁷².

History and Origin

The NAICS system was developed jointly by the U.S. Economic Classification Policy Committee (ECPC), Statistics Canada, and Mexico's Instituto Nacional de Estadística y Geografía. ⁷¹Adopted in 1997, it was designed to replace the older Standard Industrial Classification (SIC) system, which had been in use since the 1930s but was last updated in 1987. ⁶⁹, ⁷⁰The impetus for the change arose from rapid shifts in the U.S. and global economies, particularly the growth of the service sector, which the SIC system did not adequately cover. ⁶⁸The development of NAICS aimed to create a more accurate, standardized, and production-oriented classification system that could accommodate emerging economic activities and provide a higher level of comparability in business statistics among the North American countries. ⁶⁶, ⁶⁷NAICS codes are periodically reviewed and revised, typically every five years, to reflect changes in the industrial structure.
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Key Takeaways

• A NAICS code is a six-digit numerical identifier used to classify businesses by their primary economic activity in North America.
• It replaced the Standard Industrial Classification (SIC) system in 1997 to better reflect the evolving economy and enhance data comparability across the U.S., Canada, and Mexico.
• NAICS codes are crucial for government agencies to collect and analyze economic data, aiding in policy development and resource allocation.
• Businesses use their NAICS code for market analysis, regulatory compliance, eligibility for government contracts, and accessing various tax incentives.
• The hierarchical structure of the NAICS code allows for detailed industry classification, from broad sectors to specific national industries.

Interpreting the NAICS Code

A NAICS code is structured hierarchically, comprising six digits that provide increasingly specific levels of detail about a business's primary economic activity.
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• The first two digits designate the economic sector (e.g., 31-33 for Manufacturing, 52 for Finance and Insurance).
  ⁶¹, ⁶²* The third digit identifies the subsector.
  ⁵⁹, ⁶⁰* The fourth digit specifies the industry group.
  ⁵⁷, ⁵⁸* The fifth digit denotes the NAICS industry.
  ⁵⁵, ⁵⁶* The sixth digit represents the national industry, providing country-specific detail.
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  This structure allows for granular statistical analysis and a clear understanding of where a business fits within the broader economic landscape. ⁵¹, ⁵²For instance, a two-digit code offers a general overview of a sector, while the full six-digit code provides a highly specific classification, essential for tracking industry trends or conducting targeted market research.
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Hypothetical Example

Consider a new business opening a specialized coffee roasting facility that primarily sells roasted coffee beans to cafes and grocery stores. To determine its NAICS code, the owner would consult the U.S. Census Bureau's NAICS website. Starting with broad categories, they might look at "Manufacturing" (Sector 31-33). ⁴⁸Drilling down, they would find "Food Manufacturing" (Subsector 311). Further refinement leads to "Coffee and Tea Manufacturing" (Industry Group 3119). Finally, they might identify "Coffee Roasting and Other Coffee Production" as the specific industry within that group. This precise NAICS code, say 311920, helps classify the business's main revenue-generating activity for statistical purposes and potential government programs.

Practical Applications

NAICS codes serve numerous practical applications across government, finance, and business operations:

• Government Data Collection: Federal agencies like the U.S. Census Bureau and the Bureau of Labor Statistics rely on NAICS codes to collect, analyze, and publish comprehensive economic data. ⁴⁶, ⁴⁷This data is vital for understanding economic performance, formulating policy, and allocating resources.
  ⁴⁴, ⁴⁵* Government Contracting: Businesses seeking government contracts must register with their appropriate NAICS code in systems like the System for Award Management (SAM.gov). ⁴², ⁴³The Small Business Administration (SBA) uses NAICS codes to set size standards for small business eligibility and to designate specific contract set-asides, ensuring fair competition.
  ⁴⁰, ⁴¹* Regulatory Compliance and Taxation: Regulatory bodies and tax authorities often use NAICS codes to categorize businesses for industry-specific regulations and tax incentives. ³⁸, ³⁹This ensures businesses are subject to relevant rules and can access applicable benefits.
  ³⁶, ³⁷* Market Analysis: Companies and researchers leverage NAICS codes to conduct detailed market research, identify competitors, assess market trends, and benchmark performance within specific industries. ³⁴, ³⁵This facilitates informed business strategy and decision-making.
  ³³* Lending and Insurance: Financial institutions and insurers may use NAICS codes to assess the risk profile of a business, influencing loan approvals, interest rates, and insurance premiums.
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  For example, federal acquisition regulations directly reference NAICS codes to determine limitations on subcontracting for various contract types (e.g., services, construction, supplies), impacting how prime contractors can distribute work to other entities.
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Limitations and Criticisms

While highly effective, the NAICS system does have limitations. One common challenge arises because businesses, especially diversified entities, may engage in multiple economic activities that could fall under different NAICS codes. ³⁰Although the U.S. Census Bureau generally assigns only one primary NAICS code based on the activity generating the most revenue, other government agencies or private entities might assign multiple codes or interpret a business's primary activity differently. ²⁸, ²⁹This lack of centralized assignment can lead to inconsistencies.
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Another notable criticism is that some government agencies, such as the U.S. Securities and Exchange Commission (SEC), still largely utilize the older Standard Industrial Classification (SIC) codes for certain filings, rather than NAICS. ²⁶This can complicate cross-agency data comparison for certain financial data. Furthermore, while NAICS codes are essential for small business programs, the size standards associated with them (based on revenue or employee count) can vary significantly between seemingly similar industries, potentially impacting a business's ability to qualify for specific opportunities if their chosen primary NAICS code is not carefully selected. ²⁵Businesses must ensure their classification accurately reflects their operations to avoid issues, including potential scrutiny during audits.
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NAICS Code vs. SIC Code

The North American Industry Classification System (NAICS) code and the Standard Industrial Classification (SIC) code are both systems for industry classification, but they differ in structure, scope, and conceptual basis.

The primary difference lies in their detail and underlying methodology. NAICS codes group establishments based on how they produce goods or services, reflecting a more modern economic concept. ²², ²³In contrast, SIC codes grouped industries based on either demand for products or the production method, and they did not adequately cover the expanding service sector. ²⁰, ²¹While the NAICS system is the standard for federal statistical agencies, some entities, including portions of the private sector and certain government agencies like the SEC, still use SIC codes for various administrative or non-statistical purposes. ¹⁸, ¹⁹The increased specificity of the NAICS code system allows for a more granular understanding of economic activity compared to its predecessor, the SIC code.
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FAQs

How do I find my business's NAICS code?

You can find your business's NAICS code by searching the U.S. Census Bureau's official NAICS website using keywords related to your primary business activity. ¹⁵, ¹⁶Many businesses self-assign their primary NAICS code based on the activity that generates the most revenue.
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Can a business have more than one NAICS code?

While the U.S. Census Bureau generally assigns only one primary NAICS code to an establishment based on its main activity, a business may have multiple revenue-generating activities that could correspond to various NAICS codes. ¹¹, ¹²Other agencies or purposes might allow or require a business to list several relevant NAICS codes to fully capture its operations, which is important for business strategy.
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Why is having the correct NAICS code important?

Having the correct NAICS code is crucial for several reasons: it ensures accurate statistical analysis by government agencies, determines eligibility for specific government contracts and small business programs, impacts access to tax incentives, and is used by lenders and insurers for risk assessment. ⁶, ⁷, ⁸An accurate industry classification helps your business be seen correctly by various financial and regulatory bodies.
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Are NAICS codes updated?

Yes, NAICS codes are periodically reviewed and updated by federal statistical agencies, typically every five years, to reflect significant changes in the industrial structure of the North American economies and to incorporate new and emerging industries. ³, ⁴The most recent update was in 2022.¹, ²