Priceline Shoppers Face Taxing Problem

SAN FRANCISCO (05/16/2000) - Linda Tikonoff loved downsizing her grocery bills using Inc. WebHouse Club's name-your-price grocery service.

But her passion for online grocery shopping quickly faded when the Massachusetts mother of three discovered that on each purchase, she apparently was being charged up to twice her state's 5-percent sales tax.

"I know we're talking nickels and dimes, but it all adds up," Tikonoff says.

"It's the principle that gets my goat."

For Massachusetts tax collectors, it's not the principle, it's the letter of the law that irks them with Priceline WebHouse Club.

The Priceline WebHouse Club approach to tax collection is "illegal," says Fred Laskey, commissioner of the Massachusetts Department of Revenue. His agency has launched a formal investigation into how Priceline WebHouse Club computes its tax rate, although no charges against the company are pending.

"Collectively, we're talking about a lot of money here," says Laskey. He adds that consumers who "overpaid" Priceline WebHouse Club are entitled to get tax money back.

"It appears this company is making up its own rules," Laskey says.

Instead of taxes, the company levies "other charges," responds Robert Padgett, director of communications for Priceline WebHouse Club. These charges compensate Priceline WebHouse Club for taxes and other costs (such as a bottle deposit) the company pays to grocery stores when it buys goods for resale.

Padget claims the company has done nothing wrong and doesn't plan to give anyone a refund.

A Taxing Situation

Tikonoff, however, is still steamed. She first suspected trouble in April, when she used the online service to save money on a 22-ounce bottle of laundry detergent. She named her own price of $2.40 on a bottle that usually sells for $4.49.

A shrewd shopper, Tikonoff noticed on her receipt that she was being "taxed" 22 cents for the $2.40 transaction--double what she should have paid in taxes, based on Massachusetts's 5-percent sales tax.

She sent an e-mail query to Priceline WebHouse Club, asking why it charged such high taxes. She was told the site's tax rate is based on the average selling price of an item in the buyer's market, not on the actual price paid by the customer. Since the average cost of a bottle of Downey detergent is $4.49 in Tikonoff's Boston suburb, the company taxed her on that amount, not the $2.40 she paid for it through the Priceline WebHouse Club site.

Priceline Affiliate

Priceline WebHouse Club licenses's name-your-own-price business model and is promoted on the Web site. However, Priceline WebHouse Club is independently owned and operated. Priceline WebHouse Club service is available in 22 states including Massachusetts, and has nearly 700,000 customers. The company is privately held, so it's difficult to determine the volume of its transactions.

Priceline WebHouse Club updated the terms and conditions posted on its Web site late in April, after the state of Massachusetts began its inquiry, says Patricia Campbell Malone, director of communications for Massachusetts Department of Revenue. The company explains that what was previously identified as a "tax" in customer invoices should have been labeled "other charges."

At about the same time, Priceline WebHouse Club also updated customer receipts by replacing the word "tax" with "other charges."

Priceline WebHouse Club doesn't remit any money it gets from customers to a tax authority, according to company spokesperson Padgett. Priceline WebHouse Club pays full retail price and full sales tax to participating grocery stores on items sold through its Web site, and the participating grocery store is responsible for remitting sales taxes.

State Tax Authorities Frown

A half-dozen tax regulators in states where Priceline WebHouse Club does business agree that charging consumers sales tax on the full price of discounted goods is illegal.

None of the tax regulators contacted for this story were aware of the Priceline WebHouse Club controversy, however, nor did any of the state authorities announce plans to investigate Priceline WebHouse Club.

"That kind of collection of sales tax is in violation of the law," declares Gene Gavin, commissioner with the Department of Revenue Services in Connecticut, where Priceline WebHouse Club is based. Consumers pay taxes only on the purchase price, not on an average price, Gavin says., which charges consumers sales tax on the reduced price of hotel rooms and rental cars, declined comment. "We are not going to get in the middle of this," says Brian Ek, a spokesperson.

Tax experts say the Priceline WebHouse Club conflict underscores the cloudy nature of tax law as applied to new and emerging Internet business models.

Congress has imposed a moratorium on collecting taxes on products consumers purchase from online stores that are based in another state. But tax experts are divided as to where a Priceline WebHouse Club transaction takes place, and how much, if any, tax is due.

What "Other Charges"?

Priceline WebHouse Club pays full retail price and full sales taxes to participating grocery stores for the items it sells at a discount through its name-your-own-price Web-based service. It recoups the difference through marketing agreements with the vendors of the products it carries, and reward programs that entice users to sign up for credit cards, long-distance telephone services, and magazine subscriptions.

Padgett says consumers pay the equivalent of the full sales tax on their purchases--not the actual tax. "We are working with the state of Massachusetts to resolve this misunderstanding," he adds.

Representatives of the Massachusetts Department of Revenue say its review of the matter is ongoing, and the agency hopes to resolve the dispute within weeks.

"We are focusing on the bottom line here," says tax commissioner Laskey. "And that bottom line is what consumers are actually paying. And it appears to be too much."

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