Publisher's note: The author of this fine report, Dan Way, is an associate editor of the Carolina Journal, John Hood Publisher.
Software changes and ambiguity in law let Internet cafes remain open
ROANOKE RAPIDS Players continue to plunk cash down to play online sweepstakes games at the former Randy Parton Theatre in Roanoke Rapids despite a state Supreme Court ruling banning the electronic diversions.
Indeed, even after calls by the governor and attorney general's office to enforce the court's decision, several hundred Internet cafés remain open across North Carolina as their operators reconfigure their games in a manner they say complies with the law.
"There are some of the Internet sweepstakes cafés in this area that have closed, and there are some that are still operating. The theater is continuing to operate under some new types of gaming machines," said Roanoke Rapids Mayor Emery Doughtie.
Texarkana, Ark.-based HSV Entertainment principals leasing the theater "have been very forthcoming" about the machines they are operating in the newly named Royal Palace Theater, Doughtie said. "They in no way have done anything to undermine or circumvent the law."
City Attorney Gilbert Chichester sent an opinion letter to local law enforcement agencies differentiating, in his view, between machines that violate and comply with the state law. Numerous attempts to obtain a copy of that letter and an interview with Chichester were unsuccessful.
Amid the fast-changing and muddy legal landscape, law enforcement agencies are deciding, jurisdiction-by-jurisdiction, whether to crack down or back off.
"Our attorneys are fielding questions from local law enforcement and district attorneys about how to enforce the recent Supreme Court ruling and how the law applies to changes the sweepstakes industry claims to have made to games," said Noelle Talley, spokeswoman for Attorney General Roy Cooper.
"We're recommending that law enforcement investigate video sweepstakes operations in their area to determine what games are being played, and then take any enforcement action they think necessary against violators," Talley said.
"We believe the law and the ruling are clear and we're ready to defend their enforcement," she said.
"The court has ruled and they need to enforce the law," then Gov.-elect Pat McCrory said at a Jan. 3 news conference.
"These things keep getting re-appealed based upon a new definition. This is getting ridiculous," McCrory said. "I'm going to have discussions with the leadership in the Senate and the House on this issue."
Eddie Caldwell, executive vice president and general counsel of the N.C. Sheriffs Association, said he anticipated the software change. "The drug dealers, the prostitutes, all kinds of criminals are constantly tying to find some technicality around the law," he said, adding he expects enforcement to become more vigorous as more departments get familiar with the law.
"So much of that law right now is [open] for interpretation. There's no clear definition of what is acceptable and what is not acceptable except for what the city attorney wrote," said Roanoke Rapids Deputy Police Chief Tommy Hathaway.
"We are being guided by the district attorney of Halifax County. At the present time, we have not been given any kind of notification of enforcement," Hathaway said.
"Our establishments have been notified and checked by law enforcement. Anybody that had a noncompliant instrument in their facility voluntarily removed them," Hathaway said.
Attempts to contact Halifax County District Attorney Melissa Pelfrey were unsuccessful.
"We are working to find a business model that will meet the guidelines that the Supreme Court set and comply with the statutes of the state of North Carolina," said Brad Crone, a consultant with the Internet Based Sweepstakes Organization that represents a majority of the state's Internet parlor owners.
"The operators and IBSO will be working with the new legislature and the governor to take a look at the future of the industry," Crone said.
The Supreme Court ruling has taken a toll on the industry, which had about 1,000 operators statewide in December, he acknowledged.
"Probably 70 percent of operators have shuttered their sweepstakes rooms until they get a clear indication of what's going to happen with the law," Crone said. Each Internet café employed, on average, six full-time and eight part-time workers.
The sweepstakes games are free add-ons to the purchase of Internet or phone time on an Internet parlor's computers. But the Supreme Court held that winnings could not be revealed on an entertaining display as part of a game or simulated game.
In a recent blog, Christopher McLaughlin, assistant professor of public law and government with the UNC School of Government, wrote that some mechanisms using a "pre-reveal" program could comport with the law.
The pre-reveal operating system tells a player before a game in a "non-entertaining" fashion, such as a blank background, whether a purchase of phone time or Internet time includes a prize.
"[I]t's real unclear to me what's going to happen going forward" with the machines, said state Rep. Jeff Collins, R-Nash, who sponsored legislation in the last session allowing the state to collect taxes on sweepstakes operations. "If they're going to stay around ,then I'll probably try to resurrect the legislation," Collins said.
He was considering levying state business privilege taxes on each machine and using that revenue to offset other taxes, such as the one on gasoline.
Collins views sweepstakes parlors as "gambling halls that prey on the poor. My position is if they're legitimate business operations, let's regulate them the way we regulate other things."
For now, Roanoke Rapids is receiving tax revenue from the machines at the city-owned theater, although some illegal devices were removed.
The amusement devices are taxed at $2,000 for the first five, and $1,000 for each machine after that, up to a cap of $80,000 total.
Repeated attempts to contact the principals of HSV Entertainment were not successful. It has a two-year lease with a $7.25 million option to buy the property.
"As the mayor, it's been just such a relief for us to have those rental payments coming in to us and we not have to take care of the day-to-day upkeep on that facility," Doughtie said.
"Instead of operating a theater, we've been able to concentrate on our sewer lines, police, streets, and fire departments, and those sorts of things," Doughtie said.
The city owes about $1.7 million a year on the theater, which equals about 25 percent of all taxes the city generates.
The $21 million theater initially opened and failed under the management of country musician Randy Parton, brother of the more famous Dolly and Stella Parton. It then was sold to Chicago businessman Lafayette Gatling and bought back by the city before the lease with HSV Entertainment.
Doughtie admitted he is worried about whether the theater could survive without the sweepstakes income.