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Lawsuit challenges N.C. Lottery

North Carolina LotteryNorth Carolina Lottery: Lawsuit challenges N.C. Lottery

Plaintiffs say the lottery is a tax — because of the education allocation — and was passed unconstitutionally

An esoteric argument under way in the courts over the North Carolina lottery — Is a part of each ticket a tax or is the state just making a profit? — could have an effect that's easy to understand: No more lottery. The N.C. Court of Appeals will hear arguments in three weeks.

The case is pushed by a nonprofit legal group that sees the lottery as a tax that didn't go through the required legislative steps for new taxes. The state says the lottery isn't a tax but simply makes a profit on the sale of tickets, which range from $1 Powerball slips to the dozens of scratch-off games now on shelves statewide.

The plaintiffs are optimistic about the potential for a court victory that they say would likely bring a halt to the lottery.

"It seems to be an open-and-shut case," said Rep. Paul Stam of Apex, a party in the lawsuit and the Republican leader in the state House. "We're counting on the court to end it this year."

The state Attorney General's Office, which represents the state in the case, will not comment on pending litigation.

If the state ultimately loses — and no matter what happens next month, there would likely be appeals to the state Supreme Court — it could be forced to suspend the lottery.

To keep the games going, the legislature would have to pass a new lottery bill.

North Carolina was the last state on the East Coast to launch the games of chance after legislators approved them in 2005 and ended years of heated debate. The margin in the House was two votes. There was a tie in the Senate after two legislators didn't show up. Lt. Gov. Beverly Perdue broke the deadlock, and made North Carolina the 42nd state with a lottery.

Since then, scandal has tarnished the start, with three people now convicted of crimes related to the lobbying for and creation of the lottery. And the lottery's crucial supporter in the House, former Speaker Jim Black, a Democrat from Mecklenburg County, has pleaded guilty to corruption.

New documents filed as part of the case boil down the issue to a simple question: When the state takes 35 percent of lottery ticket sales and devotes that money to education, is that money a tax?

Or, is that percentage only the healthy profit from an item sold in a convenience store — no different from profit built into the sale of a candy bar or a cola — but that happens to be kept by the state instead of a company?

If the lottery is a tax, then its creation might have been illegal.

The state and leading legislators say that it isn't a tax — and they have already won a victory in Wake Superior Court.

The N.C. Court of Appeals, which takes appeals from across the state's lower courts, has scheduled arguments for May 22.

On constitutionality

Plaintiffs, which include Stam, the Wake County Taxpayers Association and the N.C. Family Policy Council, opposed the creation of the lottery in 2005. They say their goal is not to end it — but to make sure its passage followed the state constitution.

Republicans generally opposed the lottery's passage, while many Democrats — including Gov. Mike Easley — supported it. Stam said the lawsuit is one reason Republicans haven't tried this year to repeal the lottery.

Legislators, including Democrats, have been undoing some other controversial laws tied to Black. The actions include repealing laws related to mandatory eye exams; lower insurance payments for chiropractors; and a state property commission staffed by people close to Black.

In the court papers, both sides acknowledge that when the lottery was created, the legislature didn't follow a strict method for passing a tax bill that is spelled out in the state constitution.

The North Carolina Constitution requires a tax bill to be passed in three votes on three separate days in both the House and Senate — with the yeas and nays of the second and third votes publicly recorded. When the lottery passed in 2005, leaders in both chambers pushed the games' creation to final passage in quick votes, each on a single day in each chamber. In addition, there was only one recorded vote in each chamber.

The nonprofit N.C. Institute for Constitutional Law says those actions make the lottery law unconstitutional. The institute, which represents Stam and several others in the case, has been involved in other high-profile litigation but has not had much success. It challenged millions in state incentives for computer maker Dell, for example, but lost that case in a lower court and is now appealing. The institute opened in 2004 and is partially funded by Republican businessman Art Pope's family foundation.

In the case of the lottery, the institute says there is an easy remedy: Legislators can pass the lottery again.

The state and key legislative leaders say that's nonsense.

The lottery isn't a tax, so it isn't subject to those constitutional requirements, the Attorney General's Office says in court papers.

Leading legislators, such as House Speaker Joe Hackney and Senate Majority Leader Tony Rand, have said there's no reason for a do-over.

"We followed all of the rules that we had to," said Rep. Hugh Holliman, the Democratic leader in the House. "And we certainly don't want to have to revisit it."

"[T]he Lottery Act does not impose a tax," lawyers for the state wrote in a brief for appeals court judges. "It simply permits individuals who choose to do so to purchase Lottery tickets in exchange for the possibility of winning prizes, with the 'profit' from such sales being used to provide part of the funding for education in North Carolina."

They later add: "The State is allowed, when selling Lottery tickets, to make a profit."

Vendor, not sovereign

Lawyers with the Attorney General's Office say the state is collecting money from the lottery "not as a sovereign imposing taxes, but as a vendor of Lottery tickets."

The institute's lawyers say that's not how the lottery proceeds should be viewed.

The key question, they say in court papers, is the specific purpose of the lottery law — that it is to generate funds for education.

The lottery is expecting about $1 billion in sales for its first full fiscal year, which ends in June. Of that, 35 percent — or $350 million — would go to specific education programs spelled out in the law: the state's More at Four pre-kindergarten program; teacher salaries to keep class sizes low; school construction; and college scholarships for North Carolina students who qualify as needy.

The state, the institute says, has "clearly not enacted the Lottery Act so persons can merely enjoy participating in a state sponsored game of chance ... "

The institute wants the appeals court judges to focus on that 35 percent of sales the state keeps from ticket sales then divvies among education programs. The other 65 percent of sales covers prizes, commissions for retailers and the administration of the lottery.

But the 35 percent for education, the institute says, is a tax that is "assessed and allocated to fund a general public benefit: the educational needs of North Carolina's children throughout the state."

The institute raised these arguments before the games began. It sought to stall the games' start while the legal case was sorted out. Ultimately, a Wake Superior Court judge disagreed with its arguments, sending the case into appeals.

Institute lawyer Jeanette Doran Brooks said in an interview that stopping the lottery now might cause problems. But, she said, the law should be followed.

"We don't want to see a mess out of this — that hasn't been our goal," she said. "But we can't shortcut the constitution for political expediency or convenience."

News & Observer

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22 comments. Last comment 10 years ago by nc6string.
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tnlotto1's avatar - logo
nashville
United States
Member #49896
February 18, 2007
1181 Posts
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Posted: April 29, 2007, 5:48 pm - IP Logged

i wonder if this case can affect other state lotteries or just north carolina?i wouldnt want any states i  visit to lose the lottery...CryingSad

    Todd's avatar - Cylon 2.gif
    Chief Bottle Washer
    New Jersey
    United States
    Member #1
    May 31, 2000
    23260 Posts
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    Posted: April 29, 2007, 6:45 pm - IP Logged

    i wonder if this case can affect other state lotteries or just north carolina?i wouldnt want any states i  visit to lose the lottery...CryingSad

    Very good point!

     

    Check the State Lottery Report Card
    What grade did your lottery earn?

     

    Sign the Petition for True Lottery Drawings
    Help eliminate computerized drawings!

      Littleoldlady's avatar - basket
      Clarksville
      United States
      Member #487
      July 15, 2002
      17638 Posts
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      Posted: April 29, 2007, 7:03 pm - IP Logged

      No way is it a tax.  Playing the lottery is done of one's own free will and is not a "tax" .  I expect if the state runs a business such as the lottery, it should be able to make a profit.  If it was a tax, then for the people who don't play the lottery..how do they pay their fair share?  Tax some of the people?  NOT!  It fits the description of a business!  A business is allowed to make a profit!  Nut Jobs!  They are making the wrong argument.

      If you know your number is going to hit, have patience and then KILL IT!

      You never know when you will get another hit.

        Avatar
        Delaware
        United States
        Member #30273
        January 14, 2006
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        Posted: April 29, 2007, 10:00 pm - IP Logged

        I'm surprised they didn't use the "God" argument. I'm actually surprised that NC has a lottery, and I believe it will be short lived. Look back at the article about how the community shunned the $800,000 Powerball winner. NC's mentality cannot handle a lottery. I have a funny feeling that VA, TN, GA, and SC will soon see increased ticket sales from NC buyers.

          guesser's avatar - Lottery-017.jpg

          United States
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          June 16, 2006
          1969 Posts
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          Posted: April 30, 2007, 12:35 am - IP Logged

          I'm wondering about a correlation between: if it is a 'tax', then how can they tax winnings ?  Isn't that double-taxation ?

          If they have already collected a 'tax' when you purchase a ticket, how can they tax you (again) when money is going back out ? (Income tax).

          And if it is not a 'tax', again, how can they tax it when money goes back out ?

          Think of a life insurance payoff - it's not taxed as income, or anything else.. but the insurance companies pay a tax every time you make an insurance payment..

           

          LittleOldLady, I agree with ya: If you don't want to pay a cigarette tax, don't smoke, and if you don't want to pay a gasoline tax, don't drive. 

            KyMystikal's avatar - 1457224010054
            Florence, Alabama
            United States
            Member #8658
            November 13, 2004
            1993 Posts
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            Posted: April 30, 2007, 2:37 am - IP Logged

            I'm wondering about a correlation between: if it is a 'tax', then how can they tax winnings ?  Isn't that double-taxation ?

            If they have already collected a 'tax' when you purchase a ticket, how can they tax you (again) when money is going back out ? (Income tax).

            And if it is not a 'tax', again, how can they tax it when money goes back out ?

            Think of a life insurance payoff - it's not taxed as income, or anything else.. but the insurance companies pay a tax every time you make an insurance payment..

             

            LittleOldLady, I agree with ya: If you don't want to pay a cigarette tax, don't smoke, and if you don't want to pay a gasoline tax, don't drive. 

            I agree with what both of you said. Maybe they will change it to the way TN has it where there is no tax on lottery winnings from the state. That is the main reason why I now play Powerball in TN instead of KY.  I also didn't see why those groups were complaining because if it is considered a tax, it is a volunteer tax. I'm sure somewhere in the advertising for the NC lottery games it says that proceeds benefit the education system, so you can call it a tax if you want or a donation. If it could be considered a donation, since it is played voluntarily and you know it's supposed to be going to the education system, couldn't it be a deduction on taxes?

            I love doubles and remember, it's just a game!!!!!!

              Avatar
              Raleigh, NC
              United States
              Member #40946
              June 9, 2006
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              Posted: April 30, 2007, 7:10 am - IP Logged

              Double and triple taxation happens all the time already. 

              Example, when you earn money you pay your income tax.  Now whatever already taxed dollars remain are spent at the store, where you then pay sales tax.  Pretty much the government winds up with everything!  Good thing is everyone knows governments spend too much so they throw all that money back into the economy. 

                guesser's avatar - Lottery-017.jpg

                United States
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                Posted: April 30, 2007, 7:25 am - IP Logged

                Double and triple taxation happens all the time already. 

                Example, when you earn money you pay your income tax.  Now whatever already taxed dollars remain are spent at the store, where you then pay sales tax.  Pretty much the government winds up with everything!  Good thing is everyone knows governments spend too much so they throw all that money back into the economy. 

                We are aware of that, and it's going to get a lot worse.

                 

                KyMystikal: the difference between a donation and a tax is a donation is not automatically tacked onto your purchase, and a tax is.

                Go to an event where you have to 'donate' to get in ?   If you don't want to donate, they have to let you in, if they force you to donate, then, I guess you call the lawyers or the police, because then it's not a 'donation', it's a 'fee'.   The difference being if it's a 'fee', then THEY have to collect a tax on it, AND they have to have liability insurance for the event, or things like that.  It's all in the legal mumbo-jumbo of the wording. 

                  jarasan's avatar - new patrick.gif
                  Harbinger
                  D.C./MD.
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                  Posted: April 30, 2007, 9:28 am - IP Logged

                  I guarantee you the people bringing forth this lawsuit have nothing better to do.  Busy bodies,  trying to dictate what others do, they should mind their own business.

                   

                    justxploring's avatar - villiarna
                    Wandering Aimlessly
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                    Posted: April 30, 2007, 12:19 pm - IP Logged

                    Double and triple taxation happens all the time already. 

                    Example, when you earn money you pay your income tax.  Now whatever already taxed dollars remain are spent at the store, where you then pay sales tax.  Pretty much the government winds up with everything!  Good thing is everyone knows governments spend too much so they throw all that money back into the economy. 

                    Yup, there's property tax, sales tax, gas tax, etc.  Look at your cell phone bill and your home phone, internet or cable bill and the communications tax is very high.  (never can figure out all those surcharges!)  Depending on where you live, if you buy a home and you don't have any children, you still have to pay the same property tax for education as someone with 4 kids in school.  That's why I think a lottery is very important to a state as long as they are really giving the money to education.  Estate tax and gift tax is a good example of double taxation.  You earn money and pay tax on it.  Then you make interest on that money and pay tax on the interest and when you die, your heirs might have to pay tax on what you already paid tax on when you earned it, just because you were successful.  For most of us, it won't really matter anyway, unless you are very rich when you die or you can arrange to die in 2010.  However, if you give it away during your lifetime, you might have to pay a gift tax depending on how you distribute your money, but there are plenty of legal ways to avoid gift tax.  That's why a good estate planner is so important.

                    Anyway, I agree that the lottery IS NOT a tax.  It's a game.  If you went to an amusement park and paid to play, it wouldn't be considered a tax.  If you buy a raffle ticket to help out your local high school softball team, they don't call it a tax.  Jarasan put it best in a nutshell - just a bunch of busybodies.

                    I once had dinner with a man who, when I mentioned I buy lottery tickets, said to me "Oh, Dear, don't you know that's just a way the State gets more taxes from the poor?"  I never saw him again.  LOL

                      Avatar
                      NY
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                      October 16, 2005
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                      Posted: April 30, 2007, 12:31 pm - IP Logged

                      i wonder if this case can affect other state lotteries or just north carolina?i wouldnt want any states i  visit to lose the lottery...CryingSad

                      The case itself can't affect other states, but bluenoses in other states can use the same tactic. If any other state has different requirements for enacting taxes and their lottery bills didn't meet those requirements, then those laws could be overturned if the courts rule that the lottery is a tax. Such a ruling in NC would offer precedent, but it wouldn't be binding on any other state. The plaintiffs could use it to bolster their argument, but courts in other states would be free to ignore it.

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                        Coastal Georgia
                        United States
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                        October 30, 2003
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                        Posted: April 30, 2007, 12:32 pm - IP Logged

                         "Oh, Dear, don't you know that's just a way the State gets more taxes from the poor?"   

                         

                        I have people tell me that the lottery is the "redneck 401- K" ...    same thing I guess.

                         

                                                       

                                      

                         

                         

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                          NY
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                          Posted: April 30, 2007, 12:39 pm - IP Logged

                          I'm surprised they didn't use the "God" argument. I'm actually surprised that NC has a lottery, and I believe it will be short lived. Look back at the article about how the community shunned the $800,000 Powerball winner. NC's mentality cannot handle a lottery. I have a funny feeling that VA, TN, GA, and SC will soon see increased ticket sales from NC buyers.

                          They aren't using the "god" argument, because it has nothing to do with the legality of the law. Even if God himself drops by and says he doesn't like lotteries and all the players, retailers and employees of the lottery commission are going to hell, the Constitution still gives us some protection from his followers who want to force their beliefs on the rest of us.

                          Of course anyone with a lick of sense knows that their real complaint is based on religious beliefs. They're only using the tax BS because it may give them a chance to have the law overturned by the court, which is easier than getting the legislature to pass a new law to repeal the lottery.

                            Avatar
                            NY
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                            Posted: April 30, 2007, 12:59 pm - IP Logged

                            No way is it a tax.  Playing the lottery is done of one's own free will and is not a "tax" .  I expect if the state runs a business such as the lottery, it should be able to make a profit.  If it was a tax, then for the people who don't play the lottery..how do they pay their fair share?  Tax some of the people?  NOT!  It fits the description of a business!  A business is allowed to make a profit!  Nut Jobs!  They are making the wrong argument.

                            Whether or not other people pay it has nothing to do with whether or not it's tax. There are all sorts of taxes that only tax some of the people. Nobody expects people who don't own property to pay "their fair share" of property taxes, and nobody expects people who don't smoke or drink to send in tax payments for the cigarettes and alcohol they didn't buy. Contrary to popular opinion, all taxes are voluntary. If you don't want to pay a particular tax just don't meet the requirements for paying them.

                            It's not the the plaintiffs are making the wrong argument. I think they're grasping at straws because that's the best they can do, but  the courts could decide that the lottery is effectively a tax and therefore has to follow the rules on tax legislation. I think that common sense says the lottery is a product, plain and simple, and the people who sell the product are entitled to make a profit on sales. States offer all sorts of products to people. I'm sure NC has state parks that charge an admission or parking fee, but I'm guessing that nobody has ever claimed that those fees are taxes. In NY the state runs 3 ski areas that sell lift tickets. Usually the money goes into the state's gemneral fund, and some is allocated back to the program that generated the funds. Sometimes they make a profit and other times they only offset some of the operating costs.

                            Other things are in a bit of a grey area.  What about car and boat registrations,  or hunting and fishing licenses? They're usually referred to as "fees" but how does that differ from a tax?