PLR 1219013: Service provider is not a third-party settlement organization

Plain-English summary

The IRS ruled that a company providing services through websites was not a third-party settlement organization with an information reporting obligation under section 6050W. The company accepted credit and debit cards for its own services, so the relevant merchant acquiring entity reported those payment card transactions. The company did not operate a third-party payment network because its customer and provider relationships were governed by separate agreements, and transferring funds from customers to providers was not its primary function. The ruling compares the arrangement to the health carrier example in the section 6050W regulations. The conclusion was limited to the taxpayer's stated facts and representations.

Ruling snapshot

• Question: Is the taxpayer a third-party settlement organization required to report transactions under section 6050W?
• Outcome: Approved, no TPSO reporting obligation under the stated facts
• Key authorities: IRC § 6050W; Treas. Reg. § 1.6050W-1(c)(2), (c)(3), and (e)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201219013 Third Party Communication: None
Release Date: 5/11/2012 Date of Communication: Not Applicable
Index Number: 6041.00-00
Person To Contact:
-------------------------------------- ----------------------, ID No. -------------
-------------------------------------- Telephone Number:
--------------------------- ---------------------
------------------------------ Refer Reply To:
CC:PA:01
PLR-147775-11
Date:
January 30, 2012

LEGEND

Taxpayer: --------------------------------------------- and ---------------------------------------------------
--------------------------, -----------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------- and

Customers: --------------------------------------- who use Taxpayer’s services to ------------------

Providers: third-party -------- providers who provide services and goods such as -----------
------------------------------------------- and --------------- services

Dear -----------------:

This is in response to your ruling request submitted by your authorized representative
concerning the federal income tax reporting requirements for ----------------- and its
consolidated subsidiaries under section 6050W of the Internal Revenue Code (Code)
and the regulations thereunder. Specifically, ----------------- would like a ruling that --------
----------------- and its subsidiaries are not third party settlement organizations operating a
third party payment network and therefore do not have an information reporting
obligation under section 6050W.

FACTS

Taxpayer is an ---------------- company providing ------------------------- services to its
Customers through its ------------------------- websites. Through the use of these sites,
customers can search and compare information about --------------------------------
services, such as ------------------------------------------- and similar services from Providers.
PLR-147775-11 2

Taxpayer-Customer Transactions

Under the contracts between Taxpayer and its Customers, Taxpayer agrees to -----------

---------------- on behalf of its customers. This is Taxpayer’s primary service to its
Customers. In addition, Taxpayer also agrees to make payment to suppliers of goods
or services. Other agreements are made between the Taxpayer and Customer that are
not relevant here, such as ------------------------------ and -----------------------.

The primary form of payment accepted by Taxpayer for its services is credit or debit
card. It is understood by Taxpayer that these transactions between Taxpayer and its
Customers are payment card transactions subject to information reporting under section
6050W. The relevant merchant acquiring entity or electronic payment facilitator will
issue Form 1099-K to Taxpayer.

Taxpayer-Provider Transactions

Under the contracts between the Taxpayer and its Providers, the Taxpayer -----------------
--------------------- with the Providers for ----------------- goods or services that the Taxpayer
------------ for its Customers. Generally for -------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------,
the Providers agree to bill the Taxpayer by invoice for the ------------------- amounts. For -
------------------------- services, Taxpayer will purchase and resell -------- or, as customary,
------------------------------------------------- for its Customers. The latter scenario is settled by
invoice and payment as with the other types of providers. Taxpayer’s Customers are
not parties to the contracts between Taxpayer and Providers.

After a Provider invoices Taxpayer for services or goods, the Taxpayer pays the
Provider through its accounts payable system by an automated clearinghouse network,
wire transfer, or check for the pre-negotiated amounts.

LAW AND ANALYSIS

Section 6050W

Section 6050W of the Code, as enacted by the Housing Assistance Tax Act of 2008,
requires payment settlement entities to file an information return for each calendar year
with respect to payments made in settlement of reportable payment transactions.
Section 6050W covers two types of transactions: (1) payment card transactions and (2)
third party network transactions. A payment settlement entity in the payment card
context is a merchant acquiring entity; in the third party network context, it is a third
party settlement organization (TPSO).
PLR-147775-11 3

The Code and regulations define a merchant acquiring entity as the bank or other
organization with the contractual obligation to make payments to participating payees in
payment card transactions. A payment card transaction is any transaction in which a
payment card is accepted as payment.

The Code and regulations define a TPSO as the central organization that has the
contractual obligation to make payments to the participating payees of third party
network transactions. Treas. Reg. § 1.6050W-1(c)(2). A third party network transaction
is any transaction that is settled through a third party payment network. A central
organization is a TPSO with a reporting obligation if it provides a third party payment
network that allows purchasers to transfer funds to providers of goods and services.
Treas. Reg. § 1.6050W-1(c)(2).

A third party payment network is provided for when there is an arrangement that (i)
involves the establishment of accounts with the central organization by a substantial
number of providers of goods and services, (ii) who are unrelated to the central
organization, (iii) who have agreed to settle transactions with purchasers according to
the terms of the agreements, (iv) provides standards and mechanisms for settling the
transactions and (v) guarantees payment to the providers of goods and services in
settlement of transactions with purchasers. Treas. Reg. § 1.6050W-1(c)(3).

Example 17, healthcare network, of the section 6050W regulations illustrates a rationale
for the non-existence of a third party network that applies to the Taxpayer. Treas. Reg.
§ 1.6050W-1(e). The health care network is operated by a health carrier that (i) collects
premiums from covered members, pursuant to a contractual agreement between the
covered member and the health carrier, to allow the covered members access to the
health care network and (ii) pays health care providers, pursuant to a separate
contractual agreement between the health care provider and the health carrier, to
compensate the health care providers for services rendered to covered members. The
example concludes that the health carrier is not a TPSO operating a third party payment
network that enables purchasers to transfer funds to providers of goods and services.
The health carrier effectively engages in two separate agreements with the transfer of
funds from a purchaser to a provider not being the primary purpose of its arrangement
with the covered members and health care providers.

Analysis

For Taxpayer’s agreements with its Customers, it is a participating payee in the
payment card context because it accepts credit and debit cards as payment. The
relevant merchant acquiring entity has an obligation under section 6050W to report
payments made in settlement of Taxpayer’s payment card transactions.

Taxpayer is not a TPSO because it does not enable purchasers, Taxpayer’s Customers,
to transfer funds through the use of a payment network to providers of goods and
PLR-147775-11 4

services, the Providers. Instead, the Taxpayer engages in two separate agreements:
(1) an agreement with Customers to ---------------------------- on behalf of its Customers
and (2) an agreement with Providers to ----------------------------------------------------------------
------------------ and to pay amounts invoiced by Providers through an automated
clearinghouse network, wire transfer or check.

For Taxpayer’s agreements with its Providers, the primary business model of the
Taxpayer is to -------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------.1 Additionally, for
its services to its Customers, Taxpayer is the ------------------------- on such transactions,
even though the value of the goods or services furnished by the Provider is inherent in
the ------------------------------ by the Taxpayer. The service Taxpayer provides, much like
the health carrier, is not focused on the transfer of funds from the Customer to the
Provider. It is focused, instead, on ----------------------------------------------------------------------
--------- needs. For its transactions with its Providers, Taxpayer is obligated only to ------
------------------------------- established in its separate contract with the Provider. The -------
-------------------- is not known to the Customer nor is the Customer party to the Taxpayer-
Provider contract. As a result, Taxpayer’s primary function is not the facilitation of the
transfer of funds from a purchaser to a provider of goods and services.

CONCLUSION

Based exclusively on the information provided and the representations made, we have
determined that Taxpayer does not have a reporting obligation under section 6050W as
a TPSO.

This letter ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of
the Internal Revenue Code provides that it may not be used or cited as precedent.

                                                           Sincerely,



                                                           Charles A. Hall
                                                           Senior Technician Reviewer, Branch 1
                                                           (Procedure & Administration)

cc:

1
In certain Taxpayer-Provider arrangements, the Taxpayer outright purchases goods from Providers and
resells them to Customers, thereby not being a third party in its sales to Customers.