Provider payments require reporting, but not under section 6050W

Plain-English summary

A company used separate agreements with customers and service providers, set the prices charged to customers, and paid providers under its own contracts. The IRS ruled that the company was not operating a third-party payment network and therefore had no reporting obligation as a third-party settlement organization under section 6050W. The provider payments were nevertheless payments for services rather than merchandise. Payments of at least $600 to a provider therefore had to be reported under section 6041 and were subject to the backup-withholding rules of section 3406. The IRS also approved a closing agreement addressing those reporting obligations.

Ruling snapshot

• Question: Whether provider payments were reportable under sections 6050W or 6041 and subject to backup withholding
• Outcome: Mixed, no section 6050W duty, but section 6041 reporting and section 3406 backup withholding apply
• Key authorities: I.R.C. §§ 3406, 6041, 6050W; Treas. Reg. §§ 1.6041-1, 1.6041-3, 1.6050W-1

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201539025                                              Third Party Communication: None
Release Date: 9/25/2015                                        Date of Communication: Not Applicable
Index Number: 6041.00-00, 6050W.00-00,
              3406.00-00                                       Person To Contact:
                                                               -------------------------, ID No. -------------
---------------                                                Telephone Number:
---------------------------------------                        ----------------------
-----------------------------------                            Refer Reply To:
 -----------------------------                                 CC:PA:02
                                                               PLR-146802-14
                                                               Date:
                                                               June 25, 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 sections
6050W and 6041 of the Internal Revenue Code (Code) and the regulations thereunder.
Specifically, Taxpayer requested a ruling that it 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. Taxpayer also requested a ruling
that it is not subject to information reporting under section 6041 or backup withholding
under section 3406.

FACTS

Taxpayer is an ------------------company providing ----------------------------------------------------
------------------------- to its Customers through a number of -------------------------- --------------
-------------------------------------------------------------------------------------------------------------------,
as well as through third party -------------. Taxpayer also provides ---------------------- to
Customers through distribution agreements with ----------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
PLR-146802-14                                             2

-------------------------------------------------------------------------------------------------------------.
Through these various channels, Customers can ---------------------------------------------------
------------------------------------------------------------------------------------------------------------- -------
-------------------------------------------- from third-party -------- providers.

Taxpayer’s Agreements With Customers

Through 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 ----------------------. Taxpayer also provides ancillary services,
such as ---------------------------------------------------------------------------------------------------------
-----------------------------------------------------------. Taxpayer determines the amount
charged to Customers for Providers’ ----------------------; Providers have no control over,
or knowledge of, this amount.

Payments made by Customers to Taxpayer for ---------------------- to be provided by
Providers are made by credit card or debit card. Taxpayer acknowledges that these
transactions between Taxpayer and Customer are payment card transactions subject to
information reporting under section 6050W. Taxpayer receives Forms 1099-K for these
transactions from various merchant acquiring entities or electronic payment facilitators.
These transactions are not at issue in this ruling.

Taxpayer’s Agreements With Providers

Taxpayer also enters into agreements with Providers, through which Taxpayer ------------
----------------------------------------------- of Providers’ ----------------------. Customers are not a
party to the agreements between Taxpayer and Providers. Under these agreements,
Providers agree to provide ---------------------- ------------------ by Taxpayer’s Customers
and agree to -------- ----------------- made by Customers through Taxpayer. Similarly,
under the agreements Taxpayer agrees to ------------- Providers’ ----------------------, --------
------------------------------------------ --------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------monthly or twice monthly payments to Providers for ---------------------- ------.

         --------------------------and third party affiliated ------------- – Payment process

With respect to orders received through -------------------------- ------------- and affiliated
third-party -------------, Taxpayer collects payment from Customers at the time the ---------
------------ are -----------. Once a Provider has provided ----------------------, Taxpayer pays
the Provider the -------------------- rate for its ----------------------. Taxpayer pays Providers
on a monthly or twice monthly basis, typically by automated clearinghouse network or
other electronic funds transfer.
PLR-146802-14                                            3


        Third party merchants – Payment process

With respect to orders received through third party merchants, Taxpayer collects
payment from the third party merchant after the Provider provided the ------------------------
-------------------------------------------------------------------------------------------------------------------
to the Customer. Once the Provider has provided ----------------------, Taxpayer pays the
Provider the -------------------- ------ for its ----------------------. Taxpayer pays Providers on
a monthly or twice monthly basis, typically by automated clearinghouse network or other
electronic funds transfer.

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).
PLR-146802-14                                             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.

Section 6050W Analysis

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 -----------------------
-------------------------------------------------------------------------------------------------------------------,
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 ----------------------for its
Customers and pay amounts invoiced by Providers through an automated
clearinghouse network or other electronic funds transfer.

For Taxpayer’s agreements with its Providers, the primary business model of the
Taxpayer is to -------------------------- for Providers’ ----------------------, then offer those ------
---------------------- for sale to Customers through its ------------- and other distribution
channels. The rates that Taxpayer charges Customers for Provider’s ------------------------
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 ---
------------------------------------------------------------------------------. When Taxpayer sells -------
----------------------to a Customer, it is only obligated to pay the Provider of the ---------------
-------------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 contract. The Customer and the Provider do not have a direct
relationship.1 Thus, Taxpayer’s primary function is not the facilitation of the settlement


1
  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
PLR-146802-14                                      5

of a transaction between the buyer and the seller of ----------------------. In conclusion,
Taxpayer is not a TPSO and thus does not have a reporting obligation under section
6050W.

Section 6041

Section 6041(a) of the Code provides that all persons engaged in a trade or business
and making payment in the course of such trade or business to another person, of rent,
salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or
other fixed or determinable gains, profits, and income of $600 or more in any taxable
year, shall render a true and accurate return setting forth the amount of such gains,
profits, and income, and the name and address of the recipient.

Treas. Reg. § 1.6041-1(a) states that, except as provided in Treas. Reg. § 1.6041-3,
every person engaged in a trade or business shall make an information return for each
calendar year with respect to payments made by him during the calendar year in the
course of his trade or business to another person of fixed or determinable salaries,
wages, commissions, fees, and other forms of compensation for services rendered
aggregating $600 or more.

Treas. Reg. § 1.6041-3(c) provides that returns of information are not required with
respect to payments of bills for merchandise, telegrams, telephone, freight, storage, and
similar charges. The word “merchandise” is commonly defined and understood to
include goods and commodities. See, e.g., Wilkinson-Beane v. Commissioner, 420 F.
2d 352 (1st Cir. 1970) (stating that for purposes of section 471, the term “merchandise”
generally referred to “’goods purchased in condition for sale,’ ‘goods awaiting sale,’
‘articles of commerce held for sale’…The common denominator, however, seems to be
that the items in question are merchandise if held for sale.”); Black’s Law Dictionary (9th
ed. 2009) (defining “merchandise” as “a movable object involved in trade or traffic; that
which is passed from one person to another by purchase and sale”).

Section 3406(a) of the Code provides that, in the case of any reportable payment and
where certain circumstances exist, the payor shall deduct and withhold from such
payment a tax equal to the product of the fourth lowest rate of tax applicable under
section 1(c) and such payment.

Section 3406(b)(1) states that the term “reportable payment” means any reportable
interest or dividend payment, and any other reportable payment. Section 3406(b)(3)
defines other reportable payments as any payment of a kind, and to a payee, required
to be shown on a return required under section 6041, among others.

Section 6041 Analysis

pursuant to contractual agreements and pays other amounts to health care providers under separate
contractual agreements.
PLR-146802-14                                      6


Taxpayer is subject to reporting under section 6041. Taxpayer is engaged in a trade or
business during the course of which it makes payments to Providers which fall within
the broad language of section 6041(a). The payments made by Taxpayer to Providers
clearly fall within at least one of the categories of payments included in section 6041,
including “rent, salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable gains, profits, and income.” Moreover,
these payments do not fit within any of the exceptions provided in Treas. Reg.
§ 1.6041-3. Specifically, we conclude that the payments are not made for merchandise
or similar charges and thus do not fall within the exception contained in Treas. Reg.
§ 1.6041-3(c). The payments to Providers are made for the provision of --------------------
provided to Customers. At no time does Taxpayer hold such ---------------------- in order
to sell them to Customers; the ----------------------are provided directly to Customers after
Customers have ----------------------------------------- Taxpayer. Unlike “merchandise” in the
traditional sense, Taxpayer does not hold title to or possess the --------------------------
ultimately provided to Customers by Providers.

Moreover, a 2004 revenue procedure that classifies businesses by Merchant Category
Codes according to whether they predominantly furnish services or predominantly
provide goods provides further support for the position that Taxpayer is predominately
providing services and not goods or merchandise. Rev. Proc. 2004-43, 2004-2 C.B.
124 (obsoleted by T.D. 9699, removing regulations relating to information reporting and
backup withholding for the Qualified Payment Card Agent Program). Under the revenue
procedure, the following types of businesses, among others, are considered to
predominately provide services and thus are subject to reporting under section 6041: --
-------------------------------------------------------------------------------------------- Taxpayer’s
Providers fit within both of these business types, further supporting our conclusion that
Taxpayer is making payments for services, not for goods or merchandise. Rev. Proc.
2004-43 was obsoleted following the enactment of section 6050W and the payment
card reporting regime, but it still provides guidance in determining whether a particular
business is a type that should be classified as one predominately furnishing services.

Taxpayer argues that the payments to Providers fall within the exception found in Treas.
Reg. § 1.6041-3(c), which exempts from reporting under section 6041 payments for
“merchandise, telegrams, telephone, freight, storage, and similar charges.” In making
this argument, Taxpayer contends that the payments can be classified as for
“merchandise” or “similar charges.” As discussed above, we do not view payments to
Providers for ----------------------as merchandise; rather, these are payments for services.
Furthermore, we are not persuaded by the argument that the payments are for a “similar
charge.” The reporting exception contained in Treas. Reg. §1.6041-3(c) encompasses
costs relating to maintaining, transporting, and storing items held for sale, including
specific enumerated charges—merchandise, telegrams, telephone, freight, and
storage—and additional “similar charges” that are not listed. The payments to Providers
are neither payments for merchandise nor payments related to maintaining, storing, or
PLR-146802-14                                  7

transporting merchandise. Rather, these payments are payments for the core service
that Taxpayer provides to Customers—offering ----------------------for sale. Thus, these
payments do not fit within the reporting exception in Treas. Reg. § 1.6041-3(c).

Taxpayer further argues that even if the payments to Providers are for services,
Taxpayer is not required to report them under section 6041 because the payments are
for services that are being resold to Customers, not for services directly provided to
Taxpayer. The fact that Taxpayer will ultimately resell these ----------------------does not
change the nature of the payment to Providers. The payment is made for services,
regardless of who ultimately receives the ----------------------. Taxpayers did not provide
any controlling authority to establish that the resale of such services would be treated
differently for purposes of section 6041. Thus, our conclusion regarding the applicability
of section 6041 is not changed by the fact that Taxpayer is reselling the ---------------------
purchased from Providers.

Because we conclude that Taxpayer is making payments described in section 6041(a)
and does not qualify for any exception to reporting under section 6041,Taxpayer is
subject to reporting under section 6041 with respect to payments to Providers to the
extent that such amounts paid to a particular Provider are equal to or exceed $600
during the taxable year. Moreover, to the extent that payments are subject to reporting
under section 6041 they are subject to the backup withholding rules pursuant to section
3406.

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. We have concluded that Taxpayer does have a reporting obligation under
section 6041 and is subject to the backup withholding rules under section 3406.

In light of your request for a closing agreement, we will, accordingly, approve a closing
agreement with Taxpayer with respect to those issues affecting its obligations related to
information reporting on the basis set forth above. The necessary closing agreement for
Taxpayer has been prepared in triplicate and is enclosed. In pursuance of our practice
with respect to such agreements, the agreement contains a stipulation to the effect that
any change or modification of applicable statutes enacted subsequent to the date of this
agreement and made applicable to the taxable period involved will render the
agreement ineffective to the extent that it is dependent upon such statutes.

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.
PLR-146802-14                                  8




In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.


                                       Sincerely,



                                       Drita Tonuzi
                                       Associate Chief Counsel
                                       (Procedure & Administration)