Industry preps for possible sweepstakes ban | North Carolina | Indy Week

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Industry preps for possible sweepstakes ban

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A bill that would ban Internet sweepstakes cafés in North Carolina is closer to becoming law—and if it does, the video gaming industry plans to sue the state.

On Monday night, the State Senate passed House Bill 80 by a 47-1 margin. Julia Boseman, a Democrat from Wilmington, cast the opposing vote.

"It's incumbent upon us to make clear once and for all that opening an Internet sweepstakes casino is a violation of North Carolina law," said state Sen. Josh Stein, D-Wake. "They represent gambling on a massive commercial scale."

Until the House votes on the bill, which could happen next week, industry lobbyists will be smothering lawmakers in numbers that show the cafés' purported economic value to the state: $576 million within three years, according to the N.C. Education Lottery.

"It's going to be a full-court press," said Brad Crone of Campaign Connections, a consultant to the video gaming industry. "But it's going to be tough sledding in the House."

Last week the House caucus couldn't reach a consensus on the issue, but Crone predicts the full House could vote for the ban.

There are 932 cafés operating in the state, according to industry figures, which employ about 10,000 people. Crone said a ban would put those employees out of work.

Crone said he didn't know the average wage of a café worker or whether they receive health benefits. The Indy called several cafés in the Triangle, but the people who answered the phone repeatedly refused to disclose the pay, saying only that "it depends on experience."

If the House passes the ban and Gov. Beverly Perdue signs the bill into law, Crone said, the industry would sue, contending that by outlawing the sweepstakes the state is violating the equal protection clause of the Constitution.

Internet sweepstakes proponents argue the electronic system isn't gambling, but rather has a predetermined percentage of winners, much like printed games sponsored by McDonald's and Publishers Clearing House.

The industry's counterproposal asks that state and local governments tax and regulate the cafés—such as through zoning ordinances—instead of banning them. House Bill 2030, sponsored by state Rep. Kelly Alexander, a Charlotte Democrat, does just that.

Sweepstakes terminals would be connected to the N.C. Department of Revenue, Alexander told the Indy last week, "so you know instantly in the revenue department how much is being generated. You're doing daily deposits; the government is getting paid up front and you don't have the opportunity of losing the revenue stream."

However, some sweepstakes operators are chafing at what they consider onerous tax-rate and zoning regulations. Several operators have filed lawsuits against local governments. In April, the Mt. Airy Business Center challenged in federal court the authority of the city of Kannapolis, contending its taxes and zoning regulations are unconstitutional.

In addition, Kannapolis officials want to designate the Mt. Airy Business Center as a prohibited use under the city's development ordinance.

The court has not ruled on the case.

Crone said contrary to those lawsuits the Entertainment Group of North Carolina, an industry trade association and lobbyist, supports taxation and regulation.

"We are willing to have stringent guidelines on our operations," Crone said. "If a [café] doesn't pay their money, shut them down. Operators have to go through criminal background checks, and if they don't pass, shut them down."

Christopher McLaughlin, UNC assistant professor of public law and government, argued that counties and cities can make fine distinctions in zoning regulations. He noted on the UNC School of Government blog that local government also has the authority to levy privilege license taxes on businesses, unless they violate "the somewhat squishy requirement in the N.C. Constitution that all taxes be 'just and equitable.'"

"We don't know what tax level is discriminatory," McLaughlin told the Indy. "You have to ask the question, 'Are you eliminating all opportunity for profit?'"

The Mt. Airy Business Center might have a case against Kannapolis under the federal Internet Tax Freedom Act, McLaughlin said. That law prohibits taxing Internet access. However, if the taxes are aimed at the machines and not the Internet access, then that erodes the Mt. Airy Business Center's position.

The state's position that gambling should be illegal has been undermined by the North Carolina Education Lottery, which also touts the possibility, however remote, of the big payout.

"It's an awkward situation where you have the state involved in certain activity and then you make illegal another activity that's not terribly far removed from it," said Richard Ducker, UNC associate professor of public law and government.

Sweepstakes proponents underscore the similarities—and differences—between the cafés and the state-sponsored lottery. For example, the lottery is more pervasive. In Durham, there are eight cafes, Crone said, but 100 lottery centers.

Sweepstakes critics point out that the cafés often locate in low-income neighborhoods and prey on people who can least afford to lose money on the games. In February, the Indy mapped the café locations in the Triangle and found that nearly three-quarters of them were in low-income or minority neighborhoods.

"You locate your business where your customers are," Crone said. "The lottery does the same thing."

If high-rolling Internet sweepstakes players are like their lottery counterparts, they are poorer and less educated than those who spend fewer dollars on the games.

That was the conclusion of a 1999 study conducted by Duke University public policy professors Philip Cook and Charles Clotfelter, who studied the demographics of lottery players.

That study found that half of all adults surveyed had played the lottery in the previous year, but those who didn't complete high school spent the most—$700 annually per person, compared with $178 for college graduates.

In addition, people who earned less than $50,000 annually spent more on the lottery than those with higher incomes.

For several years, the nimble gaming industry has stayed one step ahead of state law. Legislators outlawed video poker in 2006, but according to UNC's Richard Ducker in a post on the School of Government blog, "by the time the 2007 ban became effective, the gaming industry had already begun to reprogram their machines and modify their methods of operation to qualify games as a form of sweepstakes in order to avoid the law."

Ducker told the Indy that criminal law, in order to be effectively enforced, must be written with very specific language, but "the nature of software development is one of those things that's hard to get a grip on defining."

Crone acknowledged that state Sen. Stein has closed many of the loopholes the gaming industry would otherwise legally slip through. "But we've got some pretty smart people and lawyers," Crone said. "The industry as a whole is aggressive in staying ahead of the curve."

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