Skip to content

Urging North Carolina Courts to Hold Lottery Is a Tax: Heatherly v. State

4 min readBy: Kevin W. Benedict, Chris Atkins, Joseph Bishop-Henchman

Download Court of Appeals Brief of Amicus Curiae in Support of Petitioners?Heatherly v. State of North CarolinaDownload State Supreme Court Brief of Amicus Curiae in Support of Petitioners?Heatherly v. State of North Carolina

North Carolina Court of Appeals No. 06-770
Filed on January 19, 2007
Argued on May 24, 2007

Decided on March 18, 2008
(Benedict & Atkins)

North Carolina Supreme Court No. 317A062
Filed on May 19, 2008
Argued on September 8, 2008
(Benedict & Henchman)

The North Carolina Supreme Court is considering the case of Heatherly v. State, brought by the North Carolina Institute for Constitutional Law, a non-profit legal foundation. In a friend-of-the-court brief filed in the case, the TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Foundation urged the Supreme Court to reverse a lower court ruling and hold that the North Carolina Education Lottery generates tax revenue, not “profits.” The Tax Foundation had previously filed a brief with the North Carolina Court of Appeals, which sustained the law in 2-1 vote.

35 percent of lottery revenues is dedicated to general state spending, equivalent to a 35-percent tax on the sale of each lottery ticket. If that revenue is found to be a tax under the meaning of North Carolina law, then the lottery’s enactment in 2005 did not meet the basic state constitutional requirements for enacting tax law.

“A ruling that the lottery is in part a tax will uphold the meaning of Article II, Section 23 of the North Carolina Constitution by ensuring transparency in the state tax system,” said Tax Foundation Tax Counsel Joe Henchman, co-author of the state supreme court brief.

According to the Tax Foundation brief, the lottery revenue meets all three tests for defining a tax. Current U.S. Supreme Court Justice Stephen Breyer laid out the criteria for defining a tax when he decided the San Juan Cellular case for the First Circuit Court of Appeals in 1992. Breyer argued that a judge should consider who imposes the assessment, who pays the assessment, and what the revenue is spent on.

In this case, the assessment was imposed by the North Carolina state general assembly, not a narrowly focused regulatory body; the assessment is paid by a broad swath of the public, not by a narrow group that benefits from a particular government service; and the revenue is spent on public education, a broadly available benefit, not on a single industry or similarly narrow group. All these facts argue for defining the lottery’s net revenue as tax revenue, not as a fee or profit or other miscellaneous charge. Other tests developed by courts in California, Hawaii, and Louisiana reach similar conclusions.

The lower courts, including the Court of Appeals, focused on whether lottery tickets are “voluntarily” purchased. But, the brief points out, what matters is whether the charge is voluntary, not whether purchase of the service is voluntary.

“Government officials defending taxes like the voluntariness test, because any tax other than a head taxA head tax, also known as a poll tax or capitation, is a flat or uniform tax levied equally on every taxpayer. Unlike an income tax, it is a fixed amount and not based on how much one earns, nor does it change based on any taxpayer circumstance or action. could be characterized as voluntary, since taxes on cigarettes, liquor, gasoline, and even income, payroll, property, and sales are the result of voluntary decisions,” Henchman said.

The Tax Foundation has long asserted that lottery revenue should be called tax revenue and that state lawmakers should never raise lottery revenue and simultaneously claim they “haven’t raised taxes.”

“Governor Easley did exactly that before the lottery’s enactment, saying the state needed ‘a tax or a lottery,'” said Tax Foundation policy analyst Alicia Hansen, author of “Lottery Taxes and State Fiscal Policy,” which lays out the Foundation’s general principles for defining a tax in this area.

The opinion of the Court of Appeals.

Tax Foundation Press Release on the Court of Appeals decision.

More on lotteries and gambling taxes here.

Blog Posts: