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Lawsuit challenges N.C. Lottery

Apr 29, 2007, 5:20 pm

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North Carolina 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."

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