Supreme Court rules out city's sweepstakes tax

Mar. 08, 2013 @ 06:12 PM

RALEIGH — The North Carolina Supreme Court said Friday high taxes aren't necessarily unlawful but had no problem striking down a city's special levy on electronic sweepstakes businesses that was at least 600 times the original rate.

The justices ruled the decision of Lumberton's leaders in 2010 to raise existing privilege taxes on sweepstakes locations in the city limits violated the state constitution's provision that taxation be exercised in a "just and equitable manner."

Companies that previously owed $12.50 per year faced taxes of at least $7,500 under the ordinance —$5,000 per business and $2,500 for each computer terminal where players played casino-style or other games to reveal potential prizes. Two sweepstakes companies challenged the tax's constitutionality, while the city sued two other businesses that didn't pay the tax.

A divided three-judge panel of the Court of Appeals last year upheld a higher privilege tax, which many municipalities have approved in part to discourage or sharply regulate what many viewed as illegal gambling.

Justice Mark Martin, writing the Supreme Court's opinion, said courts must exercise care when determining if a government has initiated an abusive tax policy, but the Lumberton case "is hardly nuanced." The new tax rate required the companies to pay from $75,000 to $137,500, the ruling said.

"The city's 59,900 percent minimum tax increase is wholly detached from the moorings of anything reasonably resembling a just and equitable tax," Martin wrote. "If the Just and Equitable Tax Clause has any substantive force, as we hold it does, it surely renders the present tax invalid."

There was no dissenting opinion from the six court members who heard the case. Martin wrote there's a constitutional tension between affirming the government's taxing authority and how to protect citizens from unjust and inequitable taxes. Challenges to taxes must be performed on a case-by-case basis, he said.

"We do not suggest, however, that any large increase in a tax, or simply a high tax, would alone be enough to run afoul" of the constitution, he wrote.

In the Lumberton case, Martin said it was clear the privilege tax on sweepstakes operations was out of step. He pointed out that of the 44 types of privilege licenses the city offered, the second-highest tax was $500 for "circuses, menageries, Wild West, (and) dog and pony shows" that visited the same week as the county fair.

The state Supreme Court in December upheld the legislature's ban on video sweepstakes machines. Some outlets say they're trying to find a way to keep operating within the law.