Determining Industry Classification of the Establishment | Class Codes

Описание: NAICS Code Tutorial Series - Determining the NAICS Industry Classification of the “Establishment.” This is the final video of a seven-part series designed to help viewers better understand the NAICS classification system.

USER LINKS:

(1/7) The Purpose of NAICS:    • The Purpose of NAICS | Class Codes  

(2/7) Historical Background:    • Historical Background of NAICS | Class Codes  

(3/7) Development of NAICS:    • The Development of NAICS | Class Codes  

(4/7) Conceptual Framework of NAICS:    • The Conceptual Framework of NAICS | Class ...  

(5/7) Structure of NAICS:    • The Structure of NAICS | Class Codes  

(6/7) Defining the "Establishment":    • Defining the Establishment | Class Codes  

(7/7) Determining Industry Classification of the Establishment:    • Determining Industry Classification of the...  

SCRIPT FOR DETERMINING THE INDUSTRY CLASSIFICATION OF AN ESTABLISHMENT

Hello, and welcome to the NAICS Code Tutorial Series by Class Codes.

Today, we will be learning how to determine the industry classification of an establishment.

An establishment is classified to an industry when its principal activity meets the definition for that industry.

This is a straightforward determination for establishments engaged in a single activity, but where establishments are engaged in more than one activity, it is necessary to establish procedures for identifying its principal activity.

In cases where there is more than one activity, the industry code is assigned based on the relative share of value-added.

The activity with the largest value-added is identified as the establishment's principal activity, and the establishment is classified to the industry corresponding to that activity.

For example, if the value added within an establishment consists of 40% from manufacturing dishwashers, 30% from manufacturing airspeed instruments and 30% from assembling clocks, it will be classified to NAICS 335223, Major kitchen appliance manufacturing.

The assignment of the industry code is performed at the 6-digit level of the classification.

In most cases, when an establishment is engaged in more than one activity, the activities are treated independently.

However, in some cases, the activities are treated in combination.

There are two types of combined activities that are given special attention in NAICS.

They are vertical integration and joint production (horizontal integration).

These combined activities have an economic basis and occur in both goods-producing and services-producing sectors.

In some cases, there are efficiencies to be gained from combining certain activities in the same establishment.

Some of these combinations occur so commonly or frequently that their combination can be treated as a third activity in its own right and explicitly classified in a specific industry.

One approach to classifying these activities would be to use the primary activity rule, that is, whichever activity is the largest.

However, the fundamental principle of NAICS is that establishments that employ the same production process should be classified in the same industry.

If the premise that the combined activities correspond to a distinct third activity is accepted, then using the primary activity rule would place establishments performing the same combination of activities in different industries, thereby violating the production principle of NAICS.

The second reason for NAICS recognizing combined activities is to improve the stability of establishment classification, both over time and among the various parties that implement the classification.

An establishment should remain classified in the same industry unless its production process changes and different parties should code the same establishment or type of establishment in the same way.

A consistent treatment of establishments with combined activities is more likely if they are classified to a single industry.

Vertical integration involves consecutive stages of fabrication or production processes in which the output of one step is the input of the next.

In general, establishments will be classified based on the final process in a vertically-integrated production environment, unless specifically identified as classified in another industry.

For example, paper may be produced either by establishments that first produce pulp and then consume that pulp to produce paper or by those establishments producing paper from purchased pulp.

NAICS specifies that both of these types of paper-producing processes should be classified in NAICS 32212, Paper mills, rather than in NAICS 32211, Pulp mills.

In other cases, NAICS specifies that vertically-integrated establishments be classified in the industry representing the first stage of the manufacturing process.