The California Department of Business Oversight (DBO) has issued an Invitation for Comments ("Invitation") relating to the scope of the "agent of a payee" exemption under the Money Transmission Act, Cal. Fin. Code §2000 et seq. (the "Act"). Comments are due on April 9. According to the DBO, it is seeking comments because it intends to develop regulations to "clarify the applicability" of the exemption.
As we have noted on multiple occasions (see here, here, and here), a key question for any company involved in facilitating payments—as a marketplace platform, a billing service, a payment facilitator, or otherwise—is whether the arrangement is subject to regulation as money transmission. California, like almost all other U.S. states, regulates money transmitters under a state-specific licensing regime (in California's case, the Act). Statutory definitions of money transmission are quite broad and typically cover any entity that receives money for transmission. Under the Act, for example, unless otherwise exempt, a license is required to engage in "[r]eceiving money for transmission." Cal. Fin. Code §§ 2010(q)(3), 2030(a).
However, § 2010(l) of the Act excludes from the licensing requirement an agent-of–a-payee transaction, which is a transaction "in which the recipient of the money or other monetary value is an agent of the payee pursuant to a preexisting written contract and delivery of the money or other monetary value to the agent satisfies the payor's obligation to the payee." The idea of an exempt agent-of-a-payee transaction is that the intermediary facilitates the receipt of payment by merchants or other payees, rather than facilitating the transmission of funds on behalf of a sender. A number of states have determined — whether through legislation, regulation, guidance, opinion letter, or otherwise — that, subject to certain conditions, state money transmission licensing laws do not apply to services provided as an agent of a merchant or other payee pursuant to a direct contractual agreement.
California, which enacted its statutory payee agency exemption in 2014, was one of the first states to do so. And now it appears to be the first state to undertake a wholesale review of the exemption. For purposes of California's exemption, a "payee" is "the provider of goods or services, who is owed payment of money or other monetary value from the payor for the goods or services," and a "payor" means the recipient of goods or services, who owes payment of money or monetary value to the payee for the goods or services.
The DBO states in the Invitation that it believes the term "goods and services" includes "the types of goods and services that are typically offered" on online marketplace e-commerce platforms that sell consumer goods, and that the terms "payor" and "payee" include consumers who order goods and services on an online marketplace platform and the merchants that offer them, respectively. The Invitation requests comments on what else should come within the scope of the statute:
- What constitutes "goods or services"? Does it include "assets, rights, interests"? Does it include "payments in satisfaction of debts to the government"?
- What does it mean to be a "payor" – to be the recipient of goods? The DBO asks, Does one "receive goods" only by being an end consumer? Or could one receive goods by physically receiving them but not consuming them, such as "by being a retailer that maintains goods in stock"?
- What does it mean to be a "payor" – to be the recipient of services? The DBO states that "[c]learly, one 'receives services' by virtue of experiencing and enjoying such services as an end user," such as a passenger receiving services from a driver associated with a ride-sharing service. But, "[d]oes a commercial entity 'receive services' when contractors perform contractual duties owed to the entity?" Thus the DBO asks, Does a ride-sharing service platform "receive services" from the aforementioned driver?
Notably, however, the Invitation does not ask what it means to be a "payee." This suggests that the DBO sees little room for interpretation with respect to the concept of a "payee" as "the provider of goods or services." (As we have noted previously, in a letter dated April 5, 2018, the DBO stated that it interprets the payee-agency exemption as providing that no more than one entity can be exempt from licensing as an agent of a payee in connection with a single transaction, because the obligation of the payor — the person purchasing the goods or services from the payee — "cannot be extinguished twice.")
Nevertheless, the DBO asks commenters to weigh in on "the full range of commercial transactions to which you believe the agency-based exemption should apply" based on the assumption (though perhaps only for the sake of argument) that "the Commissioner is open to exempting a broader range of commercial transactions [than what may be expressly exempt by Cal. Fin. Code 2010(l)] based on agency law principles." The DBO also asks commenters to discuss the economic impact of the interpretations of these terms, and to "cite legal authorities . . . in support of the interpretation you advocate."
These statements suggest that the DBO may consider using its regulatory authority to clarify what it believes is the limit of the statutory payee agency exemption and, thus, that the scope of the rulemaking that follows the comment period is not predetermined at this time. The Invitation provides a significant opportunity to weigh in as the DBO potentially redefines the specific types of payments-related products and services that are subject to the licensing requirement and regulation under the Act, and those that are excluded.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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