Research · 6 min read
What a Payment Network Reports About a Seller
The figure a card processor reports is the gross amount of transactions, computed without subtracting fees, discounts or refunds. Understanding that one definition explains why the reported number and the money a seller kept are different quantities.
Key takeaways
- The filing duty falls on the payment settlement entity — a merchant acquiring entity for card transactions, a third party settlement organization for network transactions — not on the buyer or the seller.
- The gross amount is defined without regard to credits, cash equivalents, discount amounts, fees, refunded amounts or any other amounts, measured on the date of each transaction.
- Because refunds and processing fees are disregarded, the reported figure is systematically larger than what a seller actually kept.
- The de minimis exception applies only to third party network transactions, at figures both texts state as exceeding twenty thousand dollars and exceeding two hundred transactions; no threshold is stated for payment card transactions.
- Where an intermediary or an electronic payment facilitator sits in the chain, the reporting obligation moves to it, and a facilitator needs no agreement with the seller at all.
- The return identifies a payee and an amount by year and by month; it does not describe what was sold or who bought it.
Answer first: the reporting entity is the settlement entity, not the buyer and not the seller
The statute requires each payment settlement entity to make a return for each calendar year setting forth the name, address and taxpayer identification number of each participating payee to whom payments in settlement of reportable payment transactions are made, and the gross amount of those transactions with respect to each payee.
The regulation adds a second dimension to the amount. With respect to each participating payee it requires the gross amount of the aggregate reportable payment transactions for the calendar year, and the aggregate reportable payment transactions for each month of the calendar year.
A payment settlement entity is defined in two branches. For a payment card transaction it is the merchant acquiring entity — the bank or other organization that has the contractual obligation to make payment to participating payees in settlement of payment card transactions. For a third party network transaction it is the third party settlement organization — the central organization that has the contractual obligation to make payments to participating payees of such transactions.
A participating payee is any person who accepts a payment card as payment, or who accepts payment from a third party settlement organization in settlement of such a transaction. The definition includes governmental units.
The buyer files nothing under this section. The seller files nothing under it either. The obligation sits with the entity in the middle that settles the transaction, which is why this reporting exists independently of anything either party to the sale does.
The gross amount definition, and why it does not match a seller's revenue
This is the most consequential sentence in the regulation, and it is worth quoting closely.
Gross amount means the total dollar amount 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. The dollar amount of each transaction is determined on the date of the transaction.
Six categories are named and all six are disregarded. Refunded amounts are on that list. So a purchase that was later refunded in full still contributed its full amount to the gross figure for the year, measured on the date of the transaction.
Processing fees are on the list too. The amount reported is what the buyer's card was charged, not what arrived in the seller's account after the settlement entity took its cut.
Discount amounts are on the list, which means the reported figure is not adjusted for a discount applied outside the transaction itself.
The practical consequence is a number that is systematically larger than a seller's net receipts and can be larger than its recognized revenue. That gap is a feature of the definition rather than an error in it, and nothing in this section provides for netting.
Two transaction types, and only one of them has a de minimis rule
A reportable payment transaction means any payment card transaction and any third party network transaction, and the two are defined differently.
A payment card transaction means any transaction in which a payment card, or any account number or other indicia associated with a payment card, is accepted as payment. The statute defines a payment card as any card issued under an arrangement providing for one or more issuers, a network of persons unrelated to each other and to the issuer who agree to accept the cards as payment, and standards and mechanisms for settling transactions between merchant acquiring entities and the persons accepting the cards. The statute adds that accepting an account number or other indicia associated with a payment card is treated the same as accepting the card.
A third party network transaction means any transaction settled through a third party payment network. The regulation defines that network by three characteristics: it involves the establishment of accounts with a central organization by a substantial number of unrelated providers of goods or services who have agreed to settle transactions according to the arrangement; it provides standards and mechanisms for settling the transactions; and it guarantees payment to the persons providing goods or services. An arrangement that provides for the issuance of payment cards is expressly not a third party payment network.
The de minimis exception applies to one of the two. A third party settlement organization is required to report only if the amount that would otherwise be reported with respect to a participating payee's third party network transactions exceeds twenty thousand dollars, and the aggregate number of such transactions exceeds two hundred. Both the statute and the regulation as fetched state those two figures.
There is no corresponding threshold for payment card transactions in either text. A single card sale can therefore be inside the reporting system while a comparable sale through a third party network is not.
Who files when several parties are in the chain
Real payment chains have more than two links, and both texts address that.
Where two or more persons qualify as payment settlement entities with respect to a reportable payment transaction, the regulation states that only the entity that in fact makes payment in settlement of the transaction must file.
Where reportable payment transactions of more than one participating payee are settled through an intermediary, the statute treats the intermediary as the participating payee for purposes of the settlement entity's reporting obligations, and treats the intermediary as the payment settlement entity with respect to settling those transactions with the actual payees. The regulation states the same aggregated-payee rule.
Where a payment settlement entity contracts with an electronic payment facilitator or other third party to make payments in settlement of reportable payment transactions on its behalf, the facilitator must file in lieu of the settlement entity. The regulation is emphatic about how little relationship the facilitator needs to the seller: the facilitator need not have any agreement or arrangement with the participating payee, and the payment need not come from the facilitator's account. It need only submit instructions to transfer funds to the account of the participating payee. The facilitator is liable for any applicable penalties for failure to comply.
The regulation also defines when a payment in settlement occurs: the settlement entity, or an electronic payment facilitator, makes a payment in settlement if it submits the instruction to transfer funds to the account of the participating payee. For a third party settlement organization with the contractual obligation to make payments, it also includes submitting instructions to a purchaser to transfer funds directly to the payee's account.
The returns must be made according to the forms and instructions published by the agency, which is where the layout — as distinct from the content — is set.
The payee statement, foreign payees, and the boundaries of the section
Every person required to make a return must furnish to each person with respect to whom a return is required a written statement showing the name, address and phone number of the information contact of the person required to make the return, and the gross amount of the reportable payment transactions with respect to that person. That statement must be furnished on or before the thirty-first of January of the year following the calendar year for which the return was required. It may be furnished electronically, and if so, the email address of the person required to make the return may be shown in place of the phone number.
Foreign payees are handled by exclusion with documentation conditions. The statute states that, except as provided in regulations or other guidance, the term participating payee does not include any person with a foreign address, while adding that a person with only a foreign address is not treated as a non-payee solely because it receives payments in dollars. The regulation sets out documentation standards a settlement entity may rely on to treat a payment as made to a foreign person.
Two boundaries are worth naming. The regulation contains coordination rules directing certain digital asset transactions to a different reporting section instead of this one. And the statute authorizes regulations or guidance including rules to prevent the reporting of the same transaction more than once — an acknowledgment built into the statute that overlapping reporting is a real risk in layered payment chains.
Finally, what this section does not do. It does not report what was purchased. It does not identify the buyer. It does not distinguish a health service from any other good or service. It reports a payee, a taxpayer identification number, an annual gross figure and a monthly breakdown — and the gross figure, by its own definition, ignores refunds.
Sources
- 26 U.S.C. 6050W, “Returns relating to payments made in settlement of payment card and third party network transactions”The duty of each payment settlement entity to make an annual return setting forth each participating payee's name, address and taxpayer identification number and the gross amount of reportable payment transactions; the two-branch definition of payment settlement entity and the definitions of merchant acquiring entity and third party settlement organization; the aggregated payees and electronic payment facilitator special rules; the definitions of reportable payment transaction, payment card transaction, payment card, third party network transaction and third party payment network including the exclusion of card-issuing arrangements; the exclusion of foreign-address persons from participating payee status with the dollar-payment qualification; the de minimis exception for third party settlement organizations at amounts exceeding twenty thousand dollars and more than two hundred transactions; the payee statement contents and the thirty-first of January furnishing deadline with the electronic option; and the regulatory authority including rules to prevent reporting the same transaction more than once.
- 26 CFR 1.6050W-1, “Information reporting for payments made in settlement of payment card and third party network transactions”The required annual and monthly aggregate amounts per participating payee; the definition of when a payment in settlement is made, including submission of transfer instructions and the third party settlement organization variant; the multiple payment settlement entities rule; the definition of participating payee and the foreign payee documentation provisions; the gross amount definition disregarding credits, cash equivalents, discount amounts, fees, refunded amounts and any other amounts, measured on the date of the transaction; the definitions of payment card transaction, merchant acquiring entity, third party network transaction, third party settlement organization and third party payment network with its three characteristics and card-issuance exclusion; the de minimis exception figures; the aggregated payees and electronic payment facilitator rules including the facilitator's lack of any required relationship with the payee and its penalty liability; the digital asset coordination rules; and the prescribed form requirement.
Frequently asked questions
Who files the return?
The payment settlement entity — for a payment card transaction, the merchant acquiring entity that has the contractual obligation to make payment to participating payees; for a third party network transaction, the third party settlement organization with that obligation. Where an electronic payment facilitator makes the payments on the entity's behalf, the facilitator files instead and is liable for applicable penalties.
What is the gross amount?
The regulation defines it as the total dollar amount 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, with each transaction's dollar amount determined on the date of the transaction.
Are refunds subtracted?
No. Refunded amounts are one of the six named categories the gross amount definition disregards. A transaction later refunded still contributed its full amount, measured on the date of the transaction.
Is there a minimum before reporting starts?
Only for third party network transactions. Both the statute and the regulation as fetched state that a third party settlement organization must report with respect to a participating payee only if the amount exceeds twenty thousand dollars and the aggregate number of such transactions exceeds two hundred. Neither text states a corresponding threshold for payment card transactions.
What has to be sent to the payee?
A written statement showing the name, address and phone number of the information contact of the person required to make the return, and the gross amount of the reportable payment transactions with respect to that person, furnished on or before the thirty-first of January of the following year. It may be furnished electronically, with an email address shown in place of the phone number.
Does the report say what was sold?
No. The information required is the payee's name, address and taxpayer identification number, the gross amount for the calendar year, the aggregate amount for each month, and whatever the form requires. Nothing in the section reports the goods or services involved or identifies the buyer.