Online marketplace must report provider payments under section 6050W

Plain-English summary

An online marketplace connected customers with independent service providers, collected customer payments, and remitted the providers’ fees after subtracting the platform’s charges. Under the platform’s terms, a customer’s obligation to the provider ended when the customer paid the platform, which then became responsible for paying the provider. The IRS ruled that this arrangement created a third-party payment network and made the platform a third-party settlement organization under IRC § 6050W. The platform retained the reporting obligation even when it used another party to deposit funds into a provider’s account. This letter modified and superseded PLR 201604003 by deleting part of its analysis while retaining the reporting conclusion.

Ruling snapshot

• Question: Is the online marketplace a third-party settlement organization required to report payments to participating providers under IRC § 6050W?
• Outcome: Approved
• 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: 201619006                                             Third Party Communication: None
Release Date: 5/6/2016                                        Date of Communication: Not Applicable
Index Number: 6050W.00-00
                                                              Person To Contact:
--------------                                                -----------------------, ID No. -----------
-------------------------                                     Telephone Number:
----------------------------------                            --------------------
-----------------------                                       Refer Reply To:
                                                              CC:PA:02
                                                              PLR-140896-15
                                                              Date:
                                                              February 04, 2016




LEGEND

Taxpayer: ------------------------------------------

Customers: persons who use Taxpayer's services to ----------------------------------------------
--------------------------------------------------------------------------------------------------------------------

Providers: third party providers of ---------------------


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

This letter is being sent to modify our private letter ruling (PLR 201604003) dated
August 24, 2015 (the “PLR”). We are modifying the PLR to correct certain statements
under the heading LAW AND ANALYSIS. The PLR contains a ruling that Taxpayer has
a reporting obligation under section 6050W as a third party settlement organization.
This ruling modifies and supersedes the PLR.

We make the following modifications to the PLR:

The last paragraph under the heading LAW AND ANALYSIS – Analysis is deleted in its
entirety.

The PLR, as modified, reads as follows:

FACTS

Taxpayer provides an ------- platform and marketplace through which persons offering --
----------------------------------------- (“Providers”) may ----------------------------------. Persons
seeking --------------------- (“Customers”) use Taxpayer’s platform to locate Providers and
PLR-140896-15                                             2

enter into direct agreements regarding ----------------------------. Taxpayer provides a
search function through which these interested parties can locate each other, a means
to communicate directly and determine the terms for --------------------------------, and a
secure payment processing service to permit Providers to receive payments from
Customers. ---------------------- offered by Providers include ---------------------------------------
--------------------------------------------------------------.

Taxpayer is not a party to the agreements between Providers and Customers regarding
---------------------. Taxpayer only provides the platform which allows Providers and
Customers to connect and serves as a payment collection agent for purposes of
accepting payments from Customers on behalf of Providers.

Taxpayer does not act as ------------- for Providers, although it does provide a guarantee
by which it agrees to pay Providers for -----------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------.
Furthermore, Taxpayer does not ------------------------------- offered by Providers.

Providers determine the fees they will charge for use of their --------------------- (“------------
---------------------- Fee”). Taxpayer plays no role in determining the amount of the ---------
-------------------- Fee. Providers pay a ------ Fee to Taxpayer for the use of the -------
platform and other services, which is calculated as a percentage of the ----------------------
-------------------------------------------------------------------------------------------------------------------
Fee. In addition to paying the -------------------- Fee to Providers, Customers pay a --------
--------------------------------------------------------------------------------------------------------------------
Fee to Taxpayer, which is also calculated as a percentage of the -------------------- Fee.

Taxpayer collects -------------------- Fees and ------- Fees from Customers at the time of --
---------------------------. Taxpayer agrees to initiate payment of -------------------- Fees, less
------ Fees, to Providers within 24 hours of when Customers ---------- Providers’ ------------
---------------------. Taxpayer’s terms of service state that the Customer’s payment
obligation to the Provider for the -------------------- Fees is extinguished once payment is
made to Taxpayer and Taxpayer is thereafter responsible for remitting the payment to
the Provider.

In the event that a Provider cancels a ----------, Taxpayer refunds both the -------------------
-------------------- Fee and the ------- Fee to the Customer. If a Customer cancels a ---------
---------- before confirmation by the Provider, Taxpayer refunds all funds it is holding on
behalf of the Customer to the Customer. If a Customer cancels a ---------- after -----------
---------------- are confirmed by the Provider, the Provider’s cancellation policy controls
the amount that Taxpayer refunds to the Customer.
PLR-140896-15                                   3

Under a separate Customer refund policy, Taxpayer agrees “in its discretion” to
reimburse Customers or use reasonable efforts to provide alternative comparable --------
--------------------- when certain ----------------- issues arise.

If a Customer damages a Provider’s ---------------------, Taxpayer may attempt to collect
payments for damage from the Customer’s credit card on file or it may -----------------------
----------------------------------------------------.

Payments made by Customers to Taxpayer are primarily made by credit card or through
a third party settlement organization. Taxpayer acknowledges that these payments
from Customers to Taxpayer are payment card transactions or third party network
transactions subject to information reporting under section 6050W. Taxpayer
acknowledges that the relevant merchant acquiring entity or third party settlement
organization issues Forms 1099-K to Taxpayer.

Payments made by Customers to Taxpayer are placed into custodial accounts for the
benefit of each Provider. Within 24 hours of a Customer’s ---------------------------------------
---------------------, Taxpayer pays Providers by direct deposit to a Provider’s bank
account or -------- account, through services provided by -------------------, or through a
third party who provides payment to Providers on a prepaid debit card.

Taxpayer currently reports payments made to Providers under section 6050W without
regard to the reporting thresholds for third party settlement organizations under section
6050W(e).

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).
PLR-140896-15                                           4

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).

A TPSO is not required to report third party network transactions for a participating
payee unless the amount to be reported exceeds $20,000 and the aggregate number of
transactions with the participating payee exceeds 200. I.R.C. § 6050W(e).

Analysis

Taxpayer is a TPSO with respect to payments made to Providers because it is a central
organization that has the contractual obligation to make payments to the participating
payees of a third party network transaction and provides a third party payment network
that allows purchasers to transfer funds to providers of services.

Taxpayer has established a third party payment network because it has an
arrangement: (1) through which a substantial number1 of providers of services who are
unrelated to Taxpayer have established accounts with Taxpayer and have agreed to
settle transactions for the provision of services; (2) which provides standards and
mechanisms for settling transactions, as described in Taxpayer’s terms of service, and
(3) which guarantees that persons providing services pursuant to the arrangement will
be paid for providing these services, also as described in Taxpayer’s terms of service.


1
  For purposes of this letter ruling, it is not necessary to define how many providers constitute a
“substantial number” of providers, as Taxpayer clearly exceeds any potential threshold. In its technical
explanation of the Housing Assistance Tax Act of 2008, the Joint Committee on Taxation interpreted the
term “substantial number” to mean, for example, more than 50 providers of goods or services. Joint
Committee on Taxation, Technical Explanation of Division C of H.R. 3221, The “Housing Assistance Tax
Act of 2008” as Scheduled for Consideration by the House of Representatives on July 23, 2008 (JCX-63-
08) at 61, July 23, 2008. As of the date of the ruling, according to Taxpayer’s website, Taxpayer has ------
----------------------------------------------------. Based on this information, it is clear that Taxpayer has a
“substantial number” of providers.
PLR-140896-15                                                         5

Here, the providers of services are the Providers who make -------------------------------------
----------------------------------------------------------------------------------------------available for
Customers. Although the term “goods and services” is not defined in section 6050W or
the regulations promulgated thereunder, the -----------------------provided to Customers by
Providers fall within the concept of “goods and services” as contemplated by section
6050W.2 Taxpayer guarantees that the Providers will be paid by agreeing in its terms of
service to accept payment responsibility once a Customer makes payment to Taxpayer.

In instances where Taxpayer makes payments to Providers via a third party, Taxpayer
maintains primary reporting responsibility for reporting such payments and is a TPSO
for purposes of these payments.3 When Taxpayer makes these payments, it is merely
depositing the funds in an account on behalf of the Provider; the third party is not acting
as a payment processor on behalf of Taxpayer. In these situations, Taxpayer is merely
settling a transaction through which Customers are transferring funds to Providers, the
providers of services.

CONCLUSION

Based exclusively on the information provided and the representations made, we have
determined that Taxpayer has a reporting obligation under section 6050W as a TPSO.

This modification letter, as well as the PLR, 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.




2
  Although not determinative, a 2004 revenue procedure that classifies businesses by Merchant Category
Codes according to whether they predominantly furnish services or goods supports the position that
Providers are providing services. 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 “--------------------------
------------.” Providers fit within these business types, as they are providing -----------------------------------------
-----------------------------------------------------------------------------------------------------------------; thus Providers can
be viewed as predominately providing services. Moreover, businesses which provide other types of -------
---------are also considered to predominately provide services, including ---------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------
----------------------. 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.
3
  In its ruling request, Taxpayer stated that it agreed with this conclusion but was merely seeking
confirmation that it was correct.
PLR-140896-15                                  6

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,


                                       Adrienne Griffin
                                       Senior Technician Reviewer
                                       (Procedure & Administration)