What is a third party settlement organization

A third party settlement organization (TPSO) is defined as the central organization that has the contractual obligation to make payments to participating payees of third party network transactions. This definition is consistent across various sources, including the Internal Revenue Code, Treasury Regulations, IRS publications, and FAQs.

Key characteristics of a TPSO include:

1. Central Organization: The TPSO acts as the central entity in the transaction process.
2. Contractual Obligation: The TPSO has a contractual obligation to make payments to participating payees, who are typically merchants or businesses.
3. Third Party Network Transactions: These transactions are settled through a third party payment network, which involves the establishment of accounts with the central organization by a substantial number of providers of goods or services.
4. Standards and Mechanisms for Settling Transactions: The TPSO provides the standards and mechanisms for settling transactions between providers and purchasers.
5. Guarantee of Payment: The TPSO guarantees payments to the providers of goods and services in settlement of transactions with purchasers.

Examples of TPSOs include online auction payment facilitators and apps used to handle money transfers between buyers and sellers. However, certain entities like in-house accounts payable departments, automated clearing houses, and health carriers operating a healthcare network do not qualify as TPSOs because they do not meet the necessary criteria, such as having a contractual obligation to make payments or guaranteeing payments in settlement of transactions.

Sources:
FS-2024-3
Publication 1220 (9/2023)
PLR 201622011
§ 6050W. Returns relating to payments made in settlement of payment card and third party network transactions