Priceline Shoppers Face Taxing Problem

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.

Priceline.com, 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 Priceline.com 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."