Service company was not a third-party settlement organization

Plain-English summary

A service company separately contracted with customers and with providers of goods and services. It set the prices charged to customers, paid providers under separate terms, and did not merely settle transactions between customers and providers. One part of its business also dealt with only a single provider, rather than a substantial number of provider accounts. The IRS ruled that the company was not operating a third-party payment network and had no Form 1099-K reporting obligation as a third-party settlement organization for the described transactions. The ruling did not address reporting for virtual credit-card payments.

Ruling snapshot

• Question: Must the company report the described provider payments as a third-party settlement organization?
• Outcome: Approved, no section 6050W reporting obligation as a third-party settlement organization
• Key authorities: IRC § 6050W; Treas. Reg. § 1.6050W-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201535008 Third Party Communication: None
Release Date: 8/28/2015 Date of Communication: Not Applicable
Index Number: 6050W.00-00
Person To Contact:
------------------------------------------ ------------------------, ID No. -----------
--------------------------- Telephone Number:
------------------------- --------------------
------------------------ Refer Reply To:
CC:PA:02
PLR-130064-14
Date:
May 27, 2015

LEGEND

Taxpayer: ------------------------------------------------ -----------------------------------------------------
---------------------------------.

Customers: --------------------------------------- ------------------------------------------------------------

------------------------------------------------------ --------------------------------------------------------------

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

This is in response to your ruling request submitted by your authorized representative
concerning the federal income tax reporting requirements for Taxpayer under section
6050W of the Internal Revenue Code (Code) and the regulations thereunder.
Specifically, Taxpayer requested a ruling that Taxpayer is not a third party settlement
organization operating a third party payment network and therefore does not have an
information reporting obligation under section 6050W.

FACTS

Taxpayer is an ---------------- company providing, among other services, ----------------------
---------------- services to its Customers through its -------------------------websites, ------------
-------------------------------------------------------------. Through the use of these sites,
Customers can search and compare information ----------------------------------------------------
---------------------------------------------- from third-party ------- providers.
PLR-130064-14 2

Taxpayer’s Agreements With Customers

Through separate agreements with Customers and Providers, Taxpayer ------------ -------
--------------------------------------- with Providers on behalf of Customers. Taxpayer enters
into agreements with Customers, in which it agrees to ---------- ----------------------------------
----------- with Providers. As part of these arrangements, Taxpayer agrees to make
payment to Providers of goods and services. Taxpayer also provides ancillary services,
such as ---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------.
Taxpayer determines the amount charged to Customers for Providers’ goods and
services; Provider has no control over, or knowledge of, this amount.

Payments made by Customers to Taxpayer for goods and services to be provided by
Providers are primarily made by credit card, debit card, or through a third party.
Taxpayer acknowledges that these transactions between Taxpayer and Customers are
payment card transactions or third party network transactions subject to information
reporting under section 6050W. The relevant merchant acquiring entity, electronic
payment facilitator, or third party settlement organization issues Forms 1099-K to
Taxpayer.

Taxpayer’s Agreements With Providers

     Generally

Taxpayer also enters into agreements with Providers, through which Taxpayer ------------
--------------------------------------------------- of the Providers’ goods and services.
Customers are not a party to the agreements between Taxpayer and Providers. Under
these agreements, Providers agree to provide -------------------------------------------------------

------------------------------------------------------------------------------------------------------------ for
purchase by Customers and agree to ------- ---------------- made by Customers through
Taxpayer.

Taxpayer agrees to pay Providers the ------------------------------------------------------------------
generally after the goods or services have been provided. Some Providers have
different payment terms, such as requiring payment by the Taxpayer -------------------------
----------. Providers typically send periodic invoices to Taxpayer, which are paid by
Taxpayer’s accounts payable department by automated clearinghouse network, wire
transfer, or check. In addition, a substantial number of ------------- payment transactions
with Providers are conducted using virtual credit cards.1

1
Taxpayer acknowledges that these virtual credit card transactions are reportable under section 6050W.
Taxpayer believes that the merchant acquiring entity that processes the virtual credit card payments is
responsible for reporting with respect to these transactions. We express no opinion as to reporting
obligations with respect to the virtual credit card payments, as they are outside the scope of this ruling.
PLR-130064-14 3

     -------

------- has a contract with a single Provider which provides all goods and services
purchased through -------. --------- contract with its Provider specifically prohibits it from
entering into contractual relationships with additional Providers. In all other ways, --------
--------- agreement with its Provider resembles the agreements discussed above.

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). I.R.C. § 6050W(b)(1).

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. I.R.C. §§ 6050W(b)(2)-(3), 6050W(c)(3); Treas.
Reg. § 1.6050W-1(b)(1)-(2).

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. I.R.C. § 6050W(b)(3); Treas. Reg. § 1.6050W-1(c)(2). A third
party network transaction is any transaction that is settled through a third party payment
network. I.R.C. § 6050W(c)(3). 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 any agreement or arrangement that (i) involves the
establishment of accounts with a central organization by a substantial number of
providers of goods or services who are unrelated to the central organization and who
have agreed to settle transactions for the provision of goods or services with purchasers
according to the terms of agreements; (ii) provides standards and mechanisms for
settling the transactions; and (iii) guarantees payments to the providers of goods and
services in settlement of transactions with purchasers. I.R.C. § 6050W(d)(3); Treas.
Reg. § 1.6050W-1(c)(3). Neither section 6050W nor the Treasury regulations
thereunder provide a definition of “account” for purposes of the definition of a third party
payment network.
PLR-130064-14 4

Example 17, Healthcare network, of the regulations under section 6050W provides an
illustration of circumstances in which there is a third party but no third party network.
Treas. Reg. § 1.6050W-1(e), Example 17. The health care network is operated by a
health carrier that (i) collects premiums from covered members, pursuant to contractual
agreements 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.

Analysis

Taxpayer is not a TPSO with respect to transactions conducted by ------- because --------
has only a single Provider and thus does not have accounts with a substantial number
of persons. Section 6050W requires that in order for a third party payment network to
exist, a “substantial number of persons” must establish accounts with a central
organization. Neither the Code nor the Treasury regulations promulgated thereunder
specify what constitutes a “substantial” number of persons, but it is clear that having
only one account with a single Provider does not satisfy the requirement.

Taxpayer is not a TPSO with respect to transactions conducted by ----------- because it
does not enable purchasers, Taxpayer’s Customers, to transfer funds through the use
of a payment network to providers of goods and 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
-------------------------------------------------------- for its Customers and 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 ----------------------------------------------------------------------, then offer those
goods and services for sale to Customers through its websites. The rates that Taxpayer
charges Customers for Provider’s goods and services are determined by Taxpayer, not
by Providers. These rates are determined on a Provider-by-Provider basis and do not
consist of the amount paid to the Provider plus a fixed or percentage fee. The service
that Taxpayer provides is not focused on the settlement of a transaction between
Customer and Provider. Rather, it is focused on ------------- --------------------------------------
--------------------- goods and services. When Taxpayer sells goods or services to a
Customer, it is only obligated to pay the Provider of the goods or services the -------------
------------- and established in its separate contract with Provider. The ------------------------
----- is not known to the Customer nor is the Customer a party to the Taxpayer-Provider
PLR-130064-14 5

contract. The Customer and the Provider do not have a direct relationship.2 Thus,
Taxpayer’s primary function is not the facilitation of the settlement of a transaction
between the buyer and the seller of goods.

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,



                                      Adrienne Griffin
                                      Senior Technician Reviewer
                                      (Procedure & Administration)

cc: -----------------------

2
The agreements between Taxpayer and Customers and Taxpayer and Providers are not perfectly
analogous to the agreements described in Example 17, Healthcare network, of the regulations under
section 6050W, but they are similar to them in some respects. Specifically, the payments between
Customers and Taxpayer and Taxpayer and Providers are not directly linked. In that manner, Taxpayer’s
situation resembles that of the health carrier, who collects certain amounts from covered members
pursuant to contractual agreements and pays other amounts to health care providers under separate
contractual agreements.