What is NAICS?

NAICS (pronounced ‘nakes’) stands for the North American Industry Classification System. NAICS was initially developed by Mexico's INEGI, Statistics Canada, and the U.S. Economic Classification Policy Committee. In 1997, NAICS replaced the Standard Industrial Classification (SIC) system. Learn more about the history of NAICS codes.

The goal of this collaboration was to produce common industry definitions for Canada, Mexico and the United States. These common definitions help with economic analysis of the economies of the three North American countries.

 

You can use IBISWorld to easily look up a NAICS code, industry, or product or service, but understanding the NAICS classification system is helpful.

 

Breaking Down a NAICS Code

Let’s break down the US Hotels and Motels industry – NAICS code 721110.

 

• The first two digits of the code, 72, correspond with the sector – the Accommodation and Food Services Sector.
• Adding the third digit, 721, corresponds with the Accommodation subsector.
• The first four digits, 7211, indicate this is the Traveler Accommodation industry group.
• Adding the fifth digit, 72111, tells you this is the Hotels and Motels industry.
• Finally, the sixth digit, 721110, identifies this as the Hotels and Motels industry in the United States.

Here’s another example: the US Caterers industry (NAICS code 722310) also falls under the 72 sector. However, its subsector differs (722), showing that it’s under the Food Services and Drinking Places subsector, rather than the Accommodation subsector, like our original example.

 

In understanding what NAICS code components mean and what the different digits represent, you can easily distinguish a manufacturing industry, which will always start with 31, 32 or 33, from a Finance and Insurance industry, which will always start with 51. From here, you can zoom in on a particular industry within a sector, becoming more granular with each additional digit.

 

Be aware that there are slight discrepancies in the definition of sectors across the three countries that use NAICS. For instance, the Wholesale Trade sector is defined as 41 in Canada, 42 in the United States and 43 in Mexico. However, most five-digit NAICS codes are comparable across North America.

 

The sixth digit of a NAICS code, which identifies the “national industry,” is defined by the individual countries. Therefore, six-digit codes may differ significantly across countries. Let’s dig into this a bit more …

 

Five-Digit Industry vs. Six-Digit Industry

At the five-digit level, codes are largely consistent in their definition and scope across North America. However, at the six-digit level, countries may differentiate in the number of industries they identify and the industries’ definitions based on their individual needs.

 

For instance, 31214 is the five-digit code for the Distilleries industry. This is the same throughout the United States, Canada and Mexico.

 

In the United States and Canada, the only six-digit industry beyond this five-digit is 312140, also identified as the Distilleries industry. No further industries are identified beyond this point.

 

However, in Mexico, three separate six-digit industries are identified within the five-digit industry:

• 312131 Production of Alcoholic Beverages (made from grapes)
• 312132 Production of Pulque
• 312139 Production of Cider and Other Fermented Beverages

The additional six-digit industries Mexico identifies within the universal five-digit code are specific to Mexico and its economic output.

 

For example, pulque is an alcoholic beverage almost exclusively produced in Mexico. The production of pulque is near non-existent in the United States and Canada. So, while the production of such a product would be included in the same five-digit code (31213), only Mexico has reason to separately identify it as its own industry.

 

How many NAICS codes are there?

While NAICS is the standard classification system across North America, there are some discrepancies in the individual countries’ codes and definitions. These result from code definition changes, changing needs of individual countries, and undefined growing national industries.

 

As codes become more granular, moving from the Sector level to the National Industry level, the total number of codes identified by each individual country varies. You can compare the numbers with this table:

 

Level	United States	Canada	Mexico
Sector	20	20	20
Subsector	99	102	94
Industry Group	311	322	306
Industry	709	708	315
National Industry	1057	923	1084

 

Regardless of the country, the number of individual national industries defined within any sector varies depending on the sector you’re looking at.

 

For example, the 22 sector (Utilities) contains 14 US six-digit industries. On the other hand, the 31-33 sector (Manufacturing) contains more than 360 US six-digit industries!

 

The final number of six-digit industries per sector varies depending on the number of services or products produced within the sector and how differentiated they are.

 

Why Do I Need a NAICS Code?

As a business owner, there are many reasons for needing a NAICS code. Knowing your NAICS code can make finding and applying for government grants and other incentives easier. And, many businesses use NAICS codes to identify upstream suppliers and downstream markets.

 

Below are just a few reasons to know your business’s NAICS code.

1. Government Incentives
   Government agencies throughout North America use NAICS codes to identify individual industries. Government contracts and tax incentive programs for businesses are generally defined by a NAICS code. So, knowing your business’s NAICS code can make finding applicable government programs and contracts much easier. You can also use your NAICS code to identify relevant regulatory bodies and associations and stay informed of applicable regulatory and policy changes.
   
   
2. Finding Customers
   NAICS codes can also assist businesses in identifying your customers and competitors. You can use NAICS codes to identify target industries and adapt marketing plans that cater specifically to your prime markets. By identifying the NAICS codes of your key downstream markets and competitors, businesses can gain a better understanding of what your customers will benefit from and how you can differentiate yourself from the competition.
   
   
3. Lending Potential
   Banks and other lending institutions use NAICS codes to identify industry risk levels when considering loan proposals. The risk level of an individual industry holds considerable weight in a lender’s decision to approve a business loan. Providing an inaccurate NAICS code or being unaware of your company’s NAICS code could result in a lender misaligning your business with its industry. Thus, knowing your business’s NAICS code can assist in the process of applying for loans.
   
   
4. Tax Purposes
   As mentioned above, state, provincial, and federal government agencies, including tax departments, use NAICS codes to identify industries. Providing an incorrect NAICS code on your business’s tax forms can result an agency comparing your deductions to an unrelated industry. Discrepancies such as these can result in a greater chance of being audited. Moreover, relevant tax incentives can be identified by NAICS codes. You may miss out on such incentives by misidentifying your company’s NAICS code.

 

How Do I Get a NAICS Code?

NAICS codes are self-assigned by a business based on its primary business activity. You can use IBISWorld to easily look up a NAICS code, industry, or product or service. 

 

How Do I Update My NAICS Code?
Identifying a business’s NAICS code is largely up to the business owner. There is no centralized register of businesses and corresponding NAICS codes. As a result, there is no official way to change or update your company’s NAICS code.

 

However, various government agencies keep in-house business-to-NAICS correspondence databases. If you feel your company has been misidentified in forms or records you have received from such agencies, it is recommended that you consult the agency directly.

 

Do NAICS Codes Change?
Every five years, the NAICS system is reviewed and codes are eligible to be redefined, absorbed into similar codes or otherwise amended. New codes may be added if deemed suitable or necessary. The Census provides information regarding upcoming scheduling revisions, with the next set to take place in 2022.

 

You can review previous code definitions and classifications at the US Census by following links for corresponding years on the left-hand side of the page or using the search function for individual years.

 

IBISWorld Industry Research and NAICS

IBISWorld industry reports analyze industries at both the five- and six-digit NAICS level, while also offering corresponding sector reports at the two-digit NAICS level. We offer over 1,300 US Industry Reports, 400+ Canada Industry Reports and 100+ Mexico Industry Reports.

 

Discover how a subscription to IBISWorld can help you make smarter, faster business decisions.