Online platform is a third party settlement organization

Plain-English summary

An online platform contracted with more than 50 unrelated sellers, collected buyers' credit-card payments, deducted an administrative fee, and transferred consolidated payments to each seller. Assuming the platform was not the sellers' common-law employer, the IRS ruled that it was a third party settlement organization under IRC § 6050W. Each seller was a participating payee, and each underlying service for which a seller became entitled to payment was one third party network transaction even if multiple buyers contributed or the platform bundled payments. When a seller crossed the statutory reporting thresholds, the platform had to report on Form 1099-K the gross payments before deducting its fees. The ruling did not decide whether any seller was an employee.

Ruling snapshot

• Question: Is the platform a third party settlement organization, and what payments and transactions must it report on Form 1099-K?
• Outcome: Approved, conditioned on the platform not being the sellers' common-law employer.
• 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: 201719009 Third Party Communication: None
Release Date: 5/12/2017 Date of Communication: Not Applicable
Index Number: 6050W.00-00
Person To Contact:
---------------------------------- -----------------------, ID No. ------------
----------------------------------------------- Telephone Number:
---------------------------------- --------------------
--------------------------- Refer Reply To:
CC:PA:02
PLR-125683-16
Date:
February 15, 2016

Legend

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

Platform: -------------------------------------------------------------------------------------------------------

Seller: ------------------------------------------------------------------------------------

Buyer: ----------------------------------------------------------------------------------------------------------

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

This is in response to the August 16, 2016 ruling request submitted on your behalf by
your authorized representative concerning your federal income tax reporting
requirements under section 6050W of the Internal Revenue Code (Code) and the
regulations thereunder. Specifically, you would like a ruling that:

1. Taxpayer is a third party settlement organization (TPSO) within the meaning of
   section 6050W and the regulations thereunder;

2. Each Seller that receives payment from Taxpayer is a participating payee, as that
   term is defined in section 6050W(d)(1)(A)(ii), and each consolidated Buyer
   payment from Taxpayer to a Seller is the reportable payment transaction
   described in section 6050W(c)(1); and

3. Taxpayer must report on Form 1099-K, Payment Card and Third Party Network
   Transactions, the gross amount of all payments from Taxpayer to a Seller,
   including fees deducted by Taxpayer, if payments to that Seller exceed the
   reporting threshold in section 6050W(e).

PLR-125683-16 2

FACTS

Taxpayer is a -------------- company which developed and operates an ------------------------
-----------------------------intended to facilitate --------------. --------------------------------------------

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

-------------------------------------------------------Taxpayer contracts with over 50 Sellers, who
are unrelated to Taxpayer, and who offer ------------------through the Platform.

Buyers use the Platform to pay the Seller for the Buyer’s ----------------------------------------.
The cost to each Buyer is determined by the Platform; the cost varies based on the
number of Buyers and the --------------------. The Buyer pays this amount by credit card.

Taxpayer consolidates all Buyer payments received with respect to a ---- and, after
deducting an administrative fee of approximately --------------, transfers the consolidated
Buyer payments to the Seller. Taxpayer remits the consolidated Buyer payment to the
Seller after each ----. Pursuant to the terms of use, to which each party agrees when
using the Platform, Taxpayer is contractually obligated to settle payments between
Buyers and Sellers for Buyers’ ----------------------expenses, as determined by the
Platform.

LAW & ANALYSIS

Section 6050W

Section 6050W of the Code, as enacted by the Housing Tax 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. The annual information return must set forth (1) the name, address, and
taxpayer identification number (TIN) of the participating payee to whom payments were
made and (2) the gross amount of the reportable payment transactions with respect to
that payee. I.R.C. § 6050W(a). The regulations define gross amount to mean the total
dollar amount of the of aggregate reportable payment transactions for each participating
payee, without regard to any adjustments for credits, cash equivalents, discount
amounts, fees, refunded amounts, or any other amounts. Treas. Reg.
§ 1.6050W-1(a)(6). Taxpayers required to make returns under section 6050W do so by
filing Forms 1099-K, Payment Card and Third Party Network Transactions.

Section 6050W covers two types of reportable payment transactions: (1) payment card
transactions and (2) third party network transactions. I.R.C. § 6050W(c). A payment
settlement entity in the payment card context is a merchant acquiring entity; in the third
PLR-125683-16 3

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)(2); 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 and services with
purchasers according to the terms of agreements; (ii) provides standards and
mechanisms for settling transactions; and (iii) guarantees payments to the providers of
goods and services in settlement of transactions with the purchasers. I.R.C.
§ 6050W(d)(3); Treas. Reg. § 1.6050W-1(c)(3). Neither the Code nor the regulations
defines what constitutes a “substantial number” of providers for the purposes of defining
a third party payment network. However, 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 and
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.

A participating payee, in the case of a third party network transaction, is any person who
accepts payment from a third party settlement organization in the settlement of such
transaction. I.R.C. § 6050W(d)(1)(A)(ii).

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 that participating payee exceeds 200. I.R.C. § 6050W(e).

A payer that is a common law employer with respect to a payee cannot be a TPSO with
respect to that payee. See Treas. Reg. § 1.6041-2(a)(1). Wage payments to an
PLR-125683-16 4

employee are reported on a Form W-2, Wage and Tax Statement. See, e.g., Treas.
Reg. § 31.6051-2(a).

Analysis

If Taxpayer is not the common law employer of the Sellers, Taxpayer is a TPSO with
respect to payments made to Sellers 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
of services 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 number 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 provided in Taxpayer’s terms of use; and (3)
which guarantees that persons providing services pursuant to this arrangement will be
paid for providing these services, as also provided in Taxpayer’s terms of use.

Here, the providers of services are the Sellers who make ------------------available to
Buyers.1 Over 50 of these Sellers, who are unrelated to Taxpayer, have established
accounts with Taxpayer to settle transactions for the provision of ---------- services. The
standards and mechanisms for settling transactions between Sellers and Buyers for the
provision of ---------- services are provided in Taxpayer’s terms of use, along with a
guarantee that Sellers will be paid for their services. Taxpayer is, therefore, a TPSO.

Each Seller offering ---------- services and receiving payment for such services from
Taxpayer is a participating payee because each Seller accepts payment from a TPSO
in the settlement of a third party network transaction.

A third party network transaction occurs when a Seller provides a ---------------- for which
the Seller is entitled to receive payment from Buyers via Taxpayer’s third party payment
network. Each ---------------- is a single transaction, even if multiple Buyers submit
payment for the same -----. Taxpayer’s practice of remitting payment to the Seller after
each -----, rather than on a less frequent basis, is not determinative of what constitutes a
transaction.

As a TPSO, Taxpayer is required to report third party network transactions for a
participating payee – here, a Seller – when the amount to be reported exceeds $20,000
and the aggregate number of transactions with that Seller exceeds 200. Taxpayer must
report the gross amount of all reportable payment transactions with respect to that
Seller on a Form 1099-K.
1
Although the term “goods and services” is not defined in section 6050W or the regulations under that
section, such term includes the ------------------ offered by Sellers to Buyers through Taxpayer’s Platform.
PLR-125683-16 5

The rulings contained in this letter do not address the worker classification status of any
Seller or whether Taxpayer is the common law employer of any Seller.

CONCLUSIONS

  1. If Taxpayer is not the common law employer of the Sellers, Taxpayer is a TPSO
     within the meaning of section 6050W and Treas. Reg. § 1.6050W-1;

  2. If Taxpayer is not the common law employer of the Sellers, each Seller that
     receives payment from Taxpayer is a participating payee, as that term is defined
     in section 6050W(d)(1)(A)(ii), and each ---------------- provided by a Seller, and for
     which the Seller is contractually entitled to receive payment via Taxpayer’s third
     party payment network, is a third party network transaction described in section
     6050W(c)(3);

  3. If Taxpayer is not the common law employer of the Sellers, Taxpayer must report
     on Form 1099-K the gross amount of all payments from Taxpayer to a Seller,
     including fees deducted by Taxpayer, if payments to that Seller exceed the
     reporting threshold for third party settlement organizations in section 6050W(e).

The rulings contained in this letter do not address the worker classification status of any
Seller or whether Taxpayer is the common law employer of any Seller.

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party. While this office has not verified any of the material submitted in
support of the request for rulings, it is subject to verification on examination.

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

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,



                                     Melissa A. Henkel
                                     Senior Technician Reviewer, Branch 2
                                     (Procedure & Administration)

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