Payment processor qualified as a third party settlement organization

Plain-English summary

A software and payment-processing provider asked whether it was a third party settlement organization for payments settled through two platforms. The IRS found that both platforms established third party payment networks because unrelated providers held accounts, contractual standards governed settlement, and payment to providers was guaranteed after receipt from payers. The IRS also ruled that each successfully processed payment from a payer was one transaction, regardless of how often the provider remitted accumulated funds to a customer. Under the reporting thresholds then in § 6050W(e), the provider had to report a customer's gross payments when both the dollar and transaction-count thresholds were exceeded.

Ruling snapshot

• Question: Did the two platforms make the provider a TPSO, and what counted as a transaction for the § 6050W thresholds?
• Outcome: Approved. Both platforms qualified, and each successfully processed payer payment counted separately.
• 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: 201907006 Third Party Communication: None
Release Date: 2/15/2019 Date of Communication: Not Applicable
Index Number: 6050W.00-00
Person To Contact:
---------------------- --------------------, ID No. -------------
---------------------------------- Telephone Number:
------------------------------ ----------------------
--------------------------- Refer Reply To:
CC:PA:02
PLR-116191-18
Date:
November 08, 2018

Legend

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

Customer: ------------------------------------------------------------------------------------------------------

Platform 1: -----------------------------------------------------------------------------------------------------

Platform 2: -----------------------------------------------------------------------------------------------------

Payer: -----------------------------------------------------------------------------------------------------------

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

This is in response to the May 3, 2018 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
   payments settled using Taxpayer’s Platform 1 and Platform 2; and

2. If Taxpayer qualifies as a TPSO, then for purposes of determining whether the de
   minimis rules in section 6050W(e) are satisfied, a “transaction” is defined as the
   number of payments processed on behalf of a Payer, regardless of the number
   of times the Customer receives a payment through Taxpayer’s Platform.

PLR-116191-18 2

FACTS

Taxpayer is a provider of software and services designed for -----------------------------------
------------------------------------------------------------------------- (organizations), as well as -------
----------------------(institutions). Taxpayer’s services -------------------------------------------------

---------------- Taxpayer provides services in the following areas: --------------------------------

---------------------------------------------------------. In addition, Customers can combine
Taxpayer’s software services with other services, including payment processing.

Taxpayer’s payment processing services (PPS) are divided into two categories.

--------------------------------------------------------------------------- via credit card, debit card, or
automated clearing house (ACH) transactions. Taxpayer’s PPS ------------------- provides
----------------------------institution Customers with ---------------------payment processing
services that are used by -----------------------------------------.

---------------------------------------- provides Customers with the ability to accept credit card,
debit card and ACH transactions over the Internet for payments. This PPS is governed
by the ---------------------------------------Addendum. In order to use this PPS, a Customer
must complete several steps prior to accepting online payments. First, it must create an
account by providing certain information about the Customer and creating a user name
and password. The Customer must then select a payment gateway1 and payment
processor2 so that it may create a separate merchant account. For this PPS,
Customers have the option of either purchasing --------------------------------------- (Platform
1) for its payment gateway or using an approved third-party payment gateway.3

1
A payment gateway facilitates a payment transaction by transferring information between a payment
portal (such as a website, mobile application, etc.) and the front-end processor or acquiring bank.
2
A payment processor is generally responsible for forwarding the transaction information to the
respective card association for verification and authorization. Once the payment processor receives
confirmation that the credit card details have been verified, it will relay the information back to the
merchant via the payment gateway. If verification is denied by the card association, then the payment
processor will relay the information to the merchant who will then decline the transaction.
3
If a Customer chooses not to use Platform 1, then it must enter into separate contractual arrangements
with a third-party payment gateway and payment processor. However, the Customer must first submit an
application to Taxpayer to ensure that its processor’s platform is compatible with Taxpayer’s software. So
long as the third-party platform is compatible, the fund disbursements, reconciliations, and chargebacks
are managed by the third-party processor, not Platform 1. This ruling does not opine on the federal
income tax reporting obligations of these third-party payment processors.
PLR-116191-18 3

Platform 1 provides organization Customers with the ability to safely and securely
receive and manage payments from their Payers. It allows Customers to access an
online portal where they can view their transactions, perform reconciliations, and create
reports. Platform 1 also provides screening to detect online payment fraud and uses
encryption software to store a Payer’s payment information. In order to provide this
software and these services, Taxpayer has entered into agreements with a payment
processor,4 and a merchant acquiring entity (MAE). Customers must also enter into
separate ---------------------Agreements with these entities. Taxpayer is a merchant
payment processor that processes payments that its Customers receive from
individuals.5

The payment flow process can be illustrated as follows: Payers enter their payment
information into an online form in Taxpayer’s PPS software. If the Customer selected to
have payments processed by Platform 1, then the payments are deposited into a trust
account at the MAE and disbursed to the Customer (less any refunds, chargebacks or
processing fees) on a fixed schedule.

--------------------has a platform called --------------------------------------------6 that allows
participating Customers to accept ----------payments as well as provide -------------, --------
----------------------------------and customer support (Platform 2). In order to participate,
Customers must comply with the terms outlined in the “Platform 2 -------------------------”
and the “Platform 2 ------------------ Agreement.” The Customer selects the applicable
payment plan, payment methods, -------------and related disclosures and pays an annual
-------------------------to Taxpayer based on the number of Payers. Taxpayer provides the
PPS software that allows the Customer to track -----------------------------------------------------
-by Payer. It also allows Payers to view and pay balances through an online account.

Platform 2 allows institution Customers to accept payments online via check, credit
card, debit card and ACH transactions. Taxpayer contracts with a payment gateway
and payment processor on behalf of the Customers.7 In order to provide these
services, Taxpayer enters into agreements with the credit card networks, other
processors and banks. In addition, these third parties require Customers to enter into --
-----------------------Agreements with Taxpayer’s contracted payment processors.

4
Taxpayer indicated that it recently entered into an agreement with a new third-party payment processor.
Our understanding is that this new agreement will not materially change the payment flow process;
therefore, this new agreement does not affect our analysis.
5
Taxpayer is not a depository institution and does not offer banking services or “money service business”
as those terms are defined by the United States Department of Treasury.
6
Our understanding is that Taxpayer recently acquired -------------------, but that Taxpayer is responsible
for reporting any payment card transaction that is settled through -------------------. So for the purposes of
this ruling, we will refer to --------------------as the same entity as Taxpayer.
7
The Customers do not need to select or enter into separate contractual arrangements with the payment
gateways and payment processors as they do in Program 1.
PLR-116191-18 4

In order to initiate payments, a Payer enters their payment information into an online
form using the Taxpayer’s PPS software. If the Payer chooses to pay with a credit card,
then the Payer’s payment information and payment amount is sent to the payment
gateway for approval and then sent to the credit card processor and combined into one
or more batches for deposit. The ----------payments are then deposited into Taxpayer’s
bank account and distributed to the Customer (less Taxpayer’s fees) in accordance with
the payment schedule selected by the Customer.

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 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).
PLR-116191-18 5

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).

Analysis

Taxpayer is a TPSO8 with respect to transactions settled through both Platform 1 and
Platform 2 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 recipients of goods and services to
transfer funds to providers of goods and services.9

Taxpayer has established a third party payment network because it has an
arrangement: (1) through which a substantial number of providers of goods and
services who are unrelated to Taxpayer have established accounts with Taxpayer and
have agreed to settle transactions for the provision of goods and services; (2) which
provides standards and mechanisms for settling transactions, as provided in the
contractual agreement between Taxpayer and Customers; and (3) which guarantees

8
The analysis in this section applies for payments processed through both Platform 1 and Platform 2.
9
Although the term “goods and services” is not defined in section 6050W or the regulations under that
section, such term includes -----------------------------------------------------------services offered by Customers to
Payers through Taxpayer’s Platforms. This ruling does not opine as to whether all of the payments
settled through Taxpayer’s Platforms are payments for goods and services.
PLR-116191-18 6

that persons providing goods and services pursuant to this arrangement will be paid for
providing these goods and services, as provided in the contractual agreement between
Taxpayer and Customers.

Here, the providers of goods and services are the Customers who make their goods
and services, including -------------------------------------------------, and ---------------services,
available to Payers. Over --- of these Customers, who are unrelated to Taxpayer, have
established accounts with Taxpayer to settle transactions for the provision of their
goods and services. The standards and mechanisms for settling transactions between
Customers and Payers for the provision of these goods and services are provided in the
contractual agreement between Taxpayer and Customers, along with a guarantee that
Customers will be paid for their provision of goods and services after Taxpayer receives
payment from Payers. Therefore, Taxpayer has established a third party payment
network and is a TPSO with respect to transactions settled through both Platform 1 and
Platform 2.

A third party network transaction occurs any time a transaction is settled through a third
party payment network. Each time one of Taxpayer’s Platforms successfully process a
payment from a Payer is a single transaction. The frequency with which Taxpayer
remits payment to a Customer 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 Customer – when the amount to be reported exceeds
$20,000 and the aggregate number of transactions with that Customer exceeds 200.
Taxpayer must report the gross amount of all reportable payment transactions with
respect to that Customer on a Form 1099-K.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

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.

The rulings contained in this letter are based upon information and representations
submitted by the 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.
PLR-116191-18 7

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
                                   Chief, Branch 2
                                   (Procedure and Administration)

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