Cities Using Hefty Tax Rates To Discourage Internet Sweepstakes | Eastern North Carolina Now

   Publisher's note: The author of this fine report, Dan Way, is an associate editor of the Carolina Journal, John Hood Publisher.

Video parlor operators say punitive rates will put them out of business

    HILLSBOROUGH     Staring intently at the color-splashed computer screen in front of him, J.C. Andrews twirled a mouse and prepared himself for whatever the video game threw at him.

    "People really enjoy this," said Andrews, a Hillsborough resident and regular customer of Boone Square Business Center. The video café offers sweepstakes prizes for patrons who buy Internet time or long-distance telephone service. "You win some, you lose a little."

    The sweepstakes industry is a sizable, if controversial, juggernaut in North Carolina. The state Supreme Court is expected to rule later this year whether it is legal.

    Meanwhile, state lawmakers and many municipalities already crafted laws to tax and regulate the businesses, which critics contend are a back door to gambling. Hillsborough's experience is no different.

    Andrews characterizes the several establishments in and around Hillsborough as safe, friendly, alcohol-free diversions.

    "The state has a lottery, doesn't it?" he said.

    The sweepstakes parlor tax issue popped up in House Bill 1180, an unsuccessful measure introduced in the last legislative session.

    "My bill did not legalize [sweepstakes parlors], but said if they're still there in October, then they will be taxed in January," said state Rep. Bill Owens, D-Pasquotank.

    Tax revenues would have been "anywhere from almost $100 million to $300 million" annually, earmarked for law enforcement and public education, Owens said.

    Under the bill, counties and cities could charge $1,000 a location and $500 a machine. The state would have imposed a $2,000 license fee, $1,000 fee per machine, and 4 percent state tax on gross revenue.

    Currently, municipalities have the power to tax Internet cafes but counties do not.

    Owens said Currituck County is "like a little Vegas." Proliferation of the Internet parlors is why the industry needs to be regulated.

    State Rep. Timothy Spear, D-Washington, also a primary sponsor of the bill, said, "There was not much interest on the House side this session" and even less in the Senate.

    "We'd really like to outlaw it or stop it," said Spear, who, like Owens and state Rep. Bill McGee, R-Forsyth, another primary sponsor, is retiring from the House. "I don't know that we can stop them, so if we can't stop them it's time to regulate them."

    State Rep. Jeff Collins, R-Nash, the only returning primary sponsor of the bill, said whether he reintroduces it next session depends on the Supreme Court ruling. If the court declares the machines illegal, there will be no need for the legislation.

    Collins supports the fee schedule in H.B. 1180. But he wants the revenue used for corporate income and gasoline tax relief.

    "I don't want it to be just more money for the state to spend," Collins said.

    "If they're legitimate business operations, let's regulate them the way we regulate other things," such as alcohol and tobacco sin taxes, he said.

    The state Court of Appeals has ruled a North Carolina statute banning the sweepstakes games is unconstitutional on First Amendment grounds of protected speech. The case, arising out of Guilford County, is now before the Supreme Court.

    The plaintiffs, Hest Technologies of Texas and International Internet Technologies of Oklahoma, sell long-distance telephone time and high-speed Internet service. Sweepstakes entries accompany the purchases as a marketing tool.

    Prizes for winning entries can be revealed only on a computer screen. Purchasers have the option of being informed immediately whether they won, or playing a video game to find out. Prizes are pre-programmed into computer software, so the outcome is unaffected by how the buyer chooses to determine if he's won a prize.

    Meanwhile, Fayetteville attorney Lonnie M. Player Jr. represents Internet café clients in Fayetteville and Lumberton in separate cases now before the state Supreme Court.

    "My cases deal with the tax aspect only. They do not deal with the legality of sweepstakes," said Player, who believes the state should pass legislation setting uniform standards of taxation.

    "These taxes should not be at the whim ... of hundreds of municipalities," he said.

    Player believes municipalities dislike the Internet cafés and are trying to regulate them out of existence by slapping exorbitant (and, he says, unconstitutional) business privilege taxes on them.

    "The power to tax is the power to destroy," he said.

    Player's clients claim the municipalities wrongly jacked up the privilege taxes to excessive levels that threaten the cafés' livelihood. In Lumberton, the tax went from a flat fee of $12.50 to a minimum of $7,500, with rates set at $500 per location and $2,500 per machine.

    In Fayetteville, the rate went from a $50 flat fee to a minimum of $4,500. The location is taxed $2,000, and each computer terminal $2,500. Player noted that the privilege tax for topless bars that serve alcohol is only $100. Internet cafés there do not serve alcohol.

    Bill Sinclair, a general contractor from Rockingham County who owns Boone Square Business Center in Hillsborough and another Internet café in Winston-Salem, said he was stunned when he learned Hillsborough was about to raise his business privilege fees from about $80 annually to $65,000.

    Internet café owners objected to the exploding fees, prompting the town to revise them in accordance to the language in H.B. 1180.

    "I'm still looking at $20,000, which is a darn site more than $75 or $80," Sinclair said, noting that he doesn't pay that much for the business privilege license on his Winston-Salem venue, which is in a much larger jurisdiction with higher revenues.

    "I perceive that they're a kind of business that tends to suppress other kinds of business from moving into areas ... that tends to sort of degrade neighborhoods more than other businesses," Hillsborough Mayor Tom Stevens said of why some on the Town Board wanted to raise fees to discourage more Internet cafés from opening.

    The town also may consider zoning revisions to regulate the businesses further, Stevens said.

    Sinclair said his landlord and business neighbors told him they are glad he is there, and he has received no complaints.

    "We don't serve alcohol, so it's not like we have drunken brawls in the parking lot," he said. "Little do they know that most of our clientele is middle-age women. How they spend their money is their business."

    Dan Way is an associate editor of Carolina Journal.