Best Practices

Guidelines for accurate and consistent NAICS classification.

General Principles

1. Focus on Primary Activity

NAICS classifies establishments based on their primary activity - the activity that generates the most revenue or employs the most people.

Example: A company that manufactures furniture (80% revenue) and operates a retail showroom (20% revenue) should be classified under furniture manufacturing, not retail.

2. Use the Most Specific Code

Always prefer 6-digit codes over less specific codes:

3. Check Cross-References

Cross-references indicate activities that are excluded from a code. Always check these to avoid misclassification.

Common pitfall:

• Retail bakeries (445291) vs. Commercial bakeries (311811)
• The difference is whether goods are primarily sold retail or wholesale

4. Consider the Customer

The same activity may have different codes based on who the customer is:

Classification Accuracy

High-Quality Descriptions

Good descriptions lead to better classifications:

Poor description:

“Tech company”

Better description:

“Software development company that creates custom enterprise applications for healthcare organizations, generating revenue through project-based consulting and maintenance contracts”

Include:

• Primary products or services
• How revenue is generated
• Customer type (businesses, consumers, government)
• Industry served (if specialized)

Handling Ambiguity

When a description could match multiple codes:

1. Ask clarifying questions rather than guessing
2. Present alternatives with explanations
3. Use confidence scores to indicate uncertainty
4. Let the user decide when truly ambiguous

Multiple Activities

For businesses with multiple distinct activities:

1. Identify the primary activity (most revenue)
2. Classify based on primary activity
3. Note that secondary activities may need separate codes
4. For large establishments, each location may be classified separately

Common Mistakes

Mistake 1: Classifying by Industry Served

❌ Wrong: “We develop software for restaurants, so we’re in the restaurant industry”

✅ Correct: Software development is 541511, regardless of the industry served

Mistake 2: Confusing Retail and Wholesale

Mistake 3: Ignoring Cross-References

A code that seems right may explicitly exclude your activity. Always check cross-references.

Example: Code 541519 (Other Computer Related Services) excludes:

• Data processing (518210)
• Web hosting (518210)
• Software publishing (511210)

Mistake 4: Using Outdated Codes

NAICS is updated every 5 years. The current version is NAICS 2022. Codes from older versions may:

• No longer exist
• Have been merged with other codes
• Have changed definitions

Confidence Score Guidelines

Use confidence scores to guide your response:

Documentation and Audit

For compliance purposes, maintain records of:

1. Business description used for classification
2. Recommended code with title
3. Confidence score and reasoning
4. Alternatives considered and why rejected
5. Cross-references checked
6. Date of classification

Use the write_to_workbook tool to maintain an audit trail.

Special Cases

Holding Companies

Holding companies that manage other companies: 551112

But if the holding company is primarily engaged in a specific activity through its subsidiaries, classify by that activity.

E-Commerce

Online retailers are classified the same as physical retailers, by what they sell:

• Online clothing store: 448110 (not a special “e-commerce” code)
• Online electronics store: 443142

Franchises

Classify by the actual activity, not by being a franchise:

• McDonald’s franchisee: 722513 (Limited-Service Restaurants)
• Not a special “franchise” code

Startups

Classify by current primary activity, not future plans:

• A company currently consulting but planning to launch a product: Consulting code
• Reclassify when the primary activity changes

Quality Checklist

Before finalizing a classification:

• Is this the primary activity?
• Am I using the most specific (6-digit) code?
• Have I checked cross-references?
• Is the confidence score above 0.7?
• Have I considered alternatives?
• Is the description detailed enough?