Permalinks and tags

I’m trying to setup a blog internal to my company on a cPanel/Apache server. I’m trying to use custom permalinks so it looks like sitename/category/tag, and the %category% part works great, however, when I put %tag% as described in the using permalinks part of the documentation, all permalinks wind up with sitename/category/%tag% as the url rather than the actual tag.. I’m using wp 2.7.1… Any clues?