When PayPal decided to freeze the account of snarky craft site Regretsy, it had no idea the decision would cause an Internet ripple effect accusing the e-commerce site of killing Christmas and forcing administrators to apologize.

When craft fail blog Regretsy tried to raise money to donate toys to children in need, PayPal froze the site's accounts. Its reasoning? Regretsy couldn't use the Donate button for its donations, which were meant to fund Christmas toys for children in need.

Even as it made Regretsy return the Christmas toys meant for children in need, however, PayPal was itself collecting a hefty profit in sales cuts and refund fees, a fact that went viral as Internet bloggers ran with the story of The Site That Killed Christmas.

'Donate' Button Confusion

A post on the Regretsy site (aptly titled “F**k you, PayPal) summed up the issue on Dec. 4, 2011, and the news went viral soon after.

According to PayPal’s statement, Regretsy was being targeted for having used the “Donate” button to collect money for its Secret Santa fund. It had created the fund as a Christmas move, asking for money to buy presents for children in need and nudging users to contribute $2 or more to help buy toys.

Because Regretsy, also known as the “craft fail blog,” is a for-profit site, and the “Donate” button is only supposed to be used for certified non-profits, PayPal not only froze the site’s account: it also demanded that Regretsy refund all the donations it had collected.

A quick look at PayPal’s own information page shows that the online transactions company doesn’t say anything about needing to be a certified non-profit in order to use the “Donate” button to collect funds.

Still, Regretsy administrator Helen Killer tried to fix the situation. “Since these toys are already purchased, I decided to offer them up for sale on this site, just like any other retailer would,” she wrote on the site. “You could buy them according to what you wanted to spend, and we would send them on to the recipient of your gift, just like any other retailer. But PayPal blocked that option, too.

'You can raise money for a sick cat, not for poor people.'

Things only got worse when Killer contacted PayPal’s customer service. In an increasingly bizarre exchange, the bulk of which is preserved on the Regretsy web site, Killer had what she described as “a very long and jaw-dropping conversation with an incredibly condescending representative.”

In the most infamous part of the Regretsy-PayPal exchange, the customer services representative told Killer that using the “Donate” button was more acceptable to help a sick animal than it would be to help children in need.

“What you’re doing is not a worthy cause,” the PayPal representative told Killer when she described the Christmas donations. “It’s charity.”

“What’s the difference?” Killer asked.

“You can use the ‘donate’ button to raise money for a sick cat, but not poor people,” the PayPal representative allegedly responded.

The customer service employee at PayPal went on to say that the company planned to track shipments of the toys intended for needy children to make sure they got back to the original owners, and that using the “Buy Now” button as a workaround to donate them again was not acceptable.

Helen Killer challenged the rep, saying it was unreasonable and discriminatory for PayPal to make Regretsy return all the items while still collecting an exorbitant side fee.

That’s when things got ugly. “We know what you’re doing,” the PayPal worker told Killer. “We’re through playing games with you.”

PayPal Accused of 'Killing Christmas'

PayPal may have been done dealing with Regretsy, but the Internet was just getting started.

As news of the story broke, news sites and bloggers had to catch up with an already overwhelming response from social media giants like Facebook and Twitter, which picked up the story only hours after Regretsy posted the update on its web site.

Articles calling PayPal “the Grinch” trying to “ruin the holidays” or “kill Christmas” began appearing on Dec, 6, only two days after Helen Killer wrote the blog post on Regretsy.

But users were especially furious over how much PayPal was profiting from the Regretsy mix-up. Even as the company was denying the site both the opportunity to raise money for needy children and the chance to bring toys to poor kids at Christmas time, the web site was making a killing off the confusion.

Killer recapped the transactions on Regretsy’s web site. PayPal allowed her to use the donate button (getting a portion of the donations), made her return the donations (collecting a fee), allowed her to use the “Buy Now” button (getting another portion of the sales), made her return the sales (garnering another fee), and processed the final toy purchases (getting more money from that).

'We recognized our error.'

Only two days after dismissing Regretsy’s concerns, PayPal found itself in deep water, with sites like Wired.com even compiling lists of better alternatives to the online transaction web site.

Scrambling to save its PR in the weeks before Christmas, PayPal responded to numerous calls for an apology with an official statement from Anuj Nayar, Director of Communications.

Although Nayar did not discuss the specifics of the case, citing PayPal’s privacy policy, he did say that the donated funds “have been released,” and that he was working with Regretsy directly to remedy the issue.

Nayar did not, however, apologize for the confusion. “For background, we have clear guidelines for any business that uses PayPal to accept donations,” he wrote in the statement. “In this instance, we recognized our error and moved as swiftly as possible to fix it.”

One Year After WikiLeaks

For some, however, a belated half-apology isn’t enough. After all, PayPal has a history of taking matters into its own hands when it comes to freezing accounts, and has not been known for exercising discretion when doing so.

The Regretsy scandal comes exactly one year after PayPal cut off funds to a much more famous client: WikiLeaks. At the time, PayPal claimed the site had violated its terms of service through “activities that encourage, promote, facilitate or instruct others to engage in illegal activity.”

Neither the State Department nor any others investigating WikiLeaks, however, have ever been charged with illegal activity relating to the site. As Forbes notes, meanwhile, PayPal does continue to keep News Corp as a client instead, and this is an organization that admitted to actual, illegal “theft of information.”

Little surprise, then, that Anonymous and other groups continue to call for a PayPal boycott, and that Twitter users and news bloggers continue to blast the site for its actions against Regretsy.

Freezing a charity account is never a good idea. Freezing one on a prominent web site with an eloquent blogger at its head is even worse. But taking such bumbling, at times downright offensive action at the start of the Christmas season? That’s where PayPal, not Regretsy, begins to seem like a humor site.