Online services platform is a third-party settlement organization; each service is one transaction for §6050W reporting

Plain-English summary

A company runs a mobile app and website that connects service providers with customers, collects the customers' payments, and guarantees to pay the providers, keeping a service fee. It asked the IRS to confirm two things about its Form 1099-K reporting duties under IRC Section 6050W. First, whether it is a "third party settlement organization" (TPSO), the kind of platform that must file 1099-Ks once a provider crosses the de minimis threshold (then over $20,000 and more than 200 transactions). Second, how to count "transactions" when several customers split the cost of one service or a provider does back-to-back jobs. The IRS ruled that, as long as the company is not the providers' common-law employer, it is a TPSO because it runs a payment network with a substantial number (more than 50) of unrelated providers, sets the settlement mechanics, and guarantees payment. It also ruled that each service is a single transaction, so a split-fee job paid by multiple customers counts once, while two tandem services count as two, and how often the provider is paid does not matter. The IRS did not decide whether any provider is actually an employee.

Ruling snapshot

• Question: Is the platform a TPSO under § 6050W, and does each service count as a single "transaction" for the de minimis reporting threshold even when multiple customers pay for it?
• Outcome: Approved (both rulings granted, conditioned on the platform not being the providers' common-law employer; worker-classification not addressed)
• Key authorities: IRC § 6050W(a)-(e); Treas. Reg. §§ 1.6050W-1, 1.6041-2(a)(1); Housing Assistance Tax Act of 2008; JCX-63-08

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201836008 Third Party Communication: None
Release Date: 9/7/2018 Date of Communication: Not Applicable
Index Number: 6050W.00-00
Person To Contact:
--------------------------------- --------------------, ID No. -------------
-------------------------------------------- Telephone Number:
----------------------------------- ----------------------
-------------------------- Refer Reply To:
CC:PA:02
PLR-136944-17
Date:
June 07, 2018

Legend

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

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

Service Provider: --------------------------------------------------------------------------------------------

Service Recipient: --------------------------------------------------------------------------------------------

Service: ------------------------------------------------------------------------------

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

This is in response to the November 14, 2017 ruling request submitted on your behalf
by your authorized representative concerning your federal income tax reporting
obligations under section 6050W of the Internal Revenue Code (Code) and the
regulations thereunder. Specifically, you have requested a ruling that:

1. Taxpayer is a third party settlement organization (TPSO) with respect to Service
   Recipient payments made to Service Providers through its mobile application and
   online payment platform; and

2. If Taxpayer qualifies as a TPSO, then, for the purposes of determining whether
   the de minimis rules in section 6050W(e) are satisfied, each Service provided by
   a Service Provider constitutes a single "transaction" even if multiple Service

     Recipients submit payment for the same Service and regardless of the number of
     times a Service Provider is paid for a single Service.

FACTS

Taxpayer is a ----------------company that provides a ------------------------------------------------
--------------- platform (Platform) which allows individuals providing ------------------------
Services (Service Providers) to connect with individuals (Service Recipients) seeking
such ------------------- Services. In order to offer these ------------------- Services or receive
payments through Taxpayer's Platform, Service Providers must enter into a contractual
agreement with Taxpayer. The terms of the agreement entered into between Taxpayer
and Service Providers includes a guarantee that Taxpayer will remit to Service
Providers those payments it collects from the Service Recipients for whom those
Service Providers provided ------------------- Services. Taxpayer currently contracts with
more than 50 Service Providers in the United States.

In Taxpayer's standard service and payment model, a Service Provider provides ---------
------------------- Services ------------------------------------------------------------------- in exchange
for a fee paid by the Service Recipient to the Service Provider and computed according
to a formula determined by Taxpayer (Fee). ---------------------------------------------------------

------------------------------------------------------------------------------------------------------- In
addition to the Fee, the Service Recipient is also responsible for paying any ----------------
-------------------- other applicable fees, including a Service fee charged by Taxpayer.
Taxpayer -------------------------------------------------------------------------------------------------------
-------------- collects the Fee and these additional amounts (collectively, Service
Recipient Payment) from the Service Recipient. Taxpayer then remits Fees ---------------
-------------------- to the Service Provider on at least a weekly basis.

In addition to this standard service and payment model, Taxpayer also offers --------------
---------------- another --------------------- option that pairs one Service Recipient with one or
more other Service Recipients -----------------------------------------. In this model, a Service
Provider provides two or more separate Services to two or more separate Service
Recipients in tandem, in exchange for two or more separate Fees. At the completion of
the first Service, Taxpayer collects and processes the first Fee. At the completion of the
second Service, Taxpayer then collects and processes the second Fee. Finally,
Taxpayer also offers all Service Recipients the option to split the cost of a single Service
between two or more Service Recipients (Split Fee Service). If Service Recipients
select the Split Fee Service option, Taxpayer collects and processes a single Service
Recipient Payment, a portion of which is paid by each Service Recipient. In the Split
Fee Service model, two or more Service Recipients will remit payment for a single
Service.

Taxpayer's Platform allows Service Recipients to pay for Services using various forms
of payment, including credit card, debit card, and a third-party payment processor. To
offer Services or receive payment through Taxpayer's platform, a Service Provider must
create an account via Taxpayer's online portal and provide certain information, including
a taxpayer identification number and bank account information. To provide the
standards and mechanisms for settling transactions with Service Providers, Taxpayer
has entered into agreement with banks, payment processors, and other third party
service providers.

Multiple steps are involved in the processing of payments made by Service Recipients
through Taxpayer's Platform. Service Recipients enter their payment information into
Taxpayer's Platform using either Taxpayer's mobile application or via a secure form on
Taxpayer's website. To initiate payment, Taxpayer sends payment instructions to one
of its "payment gateways," which are third party entities that facilitate payment
transactions by transferring information between Taxpayer's Platform and the front-end
payment processor or acquiring bank. After receiving payment instructions from
Taxpayer, the payment gateway sends instructions to Taxpayer's payment processors,
which are responsible for forwarding the transaction information to the respective card
associations for verification and authorization. Once the payment processor receives
confirmation that the payment card details have been verified, it relays this information
to the merchant acquiring bank, which then deposits funds attributable to the Service
Recipient's total Service Recipient Payment into Taxpayer's bank account.1 Finally,
Taxpayer deposits into the Service Provider's bank account the total Service Recipient
Payment less a service fee charged to Service Providers by Taxpayer. Payments are
deposited in a Service Provider's bank account via ACH transfer on at least a weekly
basis.

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

1
When a Service Recipient pays Taxpayer using a third-party payment processor, similar steps are taken
to process the payments. Once the Service is completed, Taxpayer sends a request to the third-party
payment processor to transfer the necessary funds from the Service Recipient's third-party payment
processor account, to the Taxpayer's third-party payment processor account. The third-party payment
processor then aggregates all the funds into a daily deposit, which is transferred to Taxpayer's bank
account. The minor differences in settling transactions when a third-party payment processor is used
instead of a payment card do not affect the analysis in this ruling.

that payee. I.R.C. § 6050W(a). The regulations define gross amount to mean the total
dollar amount of the 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
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
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 Service Providers, Taxpayer is a
TPSO with respect to payments made to Service 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 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 the contractual agreement between
Taxpayer and Service Providers; and (3) which guarantees that persons providing
services pursuant to this arrangement will be paid for providing these services, as also
provided in the contractual agreement between Taxpayer and Service Providers.

Here, the providers of services are the Service Providers who make ------------------------
Services available to Service Recipients.2 Over 50 of these Service Providers, 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 Service Providers and Service Recipients for the provision of
these ------------------- Services are provided in the contractual agreement between
Taxpayer and Service Providers, along with a guarantee that Service Providers will be
paid for their Services. Taxpayer is, therefore, a TPSO.

A third party network transaction occurs when a Service Provider provides a Service for
which the Service Provider is entitled to receive payment from a Service Recipient or
2
Although the term "goods and services" is not defined in section 6050W or the regulations under that
section, such term includes the Services offered by Service Providers to Service Recipients through
Taxpayer's Platform.

Service Recipients via Taxpayer's third party payment network. Each Service,-------------
------------------------------------------------------------------------------------------ provided by
Service Provider and paid for by a Service Recipient or Service Recipients is a single
transaction. In the context of a Split Fee Service, where two or more Service Recipients
submit payment for the same Service, there is only one transaction. When a Service
Provider is providing two or more separate Services in tandem, there is a separate
transaction for each Service. The frequency with which Taxpayer remits payment to a
Service Provider is not determinative of what constitutes a transaction for the purposes
of section 6050W.

As a TPSO, Taxpayer is required to report third party network transactions for a
participating payee - here, a Service Provider - when the amount to be reported
exceeds $20,000 and the aggregate number of transactions with that Service Provider
exceeds 200. Taxpayer must report the gross amount of all reportable payment
transactions with respect to that Service Provider on a Form 1099-K.

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

CONCLUSIONS

1. If Taxpayer is not the common law employer of the Service Providers, Taxpayer
   is a TPSO within the meaning of section 6050W and Treas. Reg. § 1.6050W-1
   with respect to payments made by Service Recipients to Service Providers
   through Taxpayer's Platform;

2. If Taxpayer is a TPSO and not the common law employer of the Service
   Providers, and for the purposes of determining whether the de minimis reporting
   threshold in section 6050W(e) has been satisfied, each Service provided by a
   Service Provider constitutes a single "transaction" even if multiple Service
   Recipients submit payment for the same Service and regardless of the number of
   times a Service Provider is paid for a single Service.

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

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,



                                   Adrienne Griffin
                                   Branch Chief, Branch 2
                                   (Procedure & Administration)