North Carolina Court Says Lottery is Not a Tax; Strong Dissent

March 18, 2008

The North Carolina Court of Appeals ruled 2 to 1 today that the state lottery is constitutional, because it neither pledges the credit of the state nor imposes a tax. The Tax Foundation had submitted an amicus brief supporting the constitutional challenge to the law brought by the North Carolina Institute for Constitutional Law. Click here for our report on the court’s oral argument, which occurred in May 2007.

The majority opinion, written by Judge James Wynn, Jr. (D), held that the purchase of lottery tickets is more akin to paying a toll to enjoy a government-provided benefit rather than paying a tax. Further, purchasers of a winning ticket enjoy an exclusive right to the benefits that accrue, a benefit not shared generally by the citizens of North Carolina (like tax revenue would be).

This discussion is both true and incomplete, in that it refers only to the 65 percent of lottery revenues that are used to pay prizes and administer the game. That portion of the purchase can be described as a fee and analogous to tolls. But that’s not the case with the remaining 35 percent, which is a tax.

Judge Ann Marie Calabria (R), in a twelve-page dissent, made this point excellently (citations omitted, bold added):

Applying the San Juan Cellular test to the case sub judice leads to the conclusion that the thirty-five percent assessment is a tax. First, the General Assembly imposed the assessment, and such enactments favor the finding of a tax. Second, the assessment is imposed on every purchaser of lottery tickets. Third, the purpose of the assessment is to raise revenue for education programs which is a “general public purpose[ ].” Unlike a fee, the assessment does not merely create incidental revenue used for education. Rather, the revenues generated are placed in a special state fund unrelated to gambling which indicates the assessment does not merely create incidental revenue used for education.[…]

As in the toll revenue and liquor surcharge cases, the key point in the case sub judice is the purpose behind the fee. The majority focuses on whether a person voluntarily chooses to purchase a lottery ticket. Yet, it does not matter whether a person voluntarily chooses to purchase a lottery ticket or voluntarily chooses to pay a toll. Virtually every purchase is voluntary and the majority’s analysis would convert nearly every assessment, including a general sales tax, into a “fee.”

Rather than focusing on the voluntary nature of purchasing a lottery ticket, the focus must be on the purpose behind the fee. The purpose of a toll payment is to generate funds to pay for state highway expenses. However, the purpose of the lottery is to raise revenues for North Carolina’s education fund. As such, the revenues raised are not incidental to the game nor reasonably related to the maintenance and operation of the game, but are central to the game’s purpose; therefore the revenues from the lottery are taxes. The Lottery Act is unconstitutional because it is a revenue bill and was not passed in accordance with the constitutional mandates pursuant to Article II, § 23.

The majority wrote that because the lottery is voluntary, it cannot be a tax, so the San Juan Cellular case is “irrelevant.” But San Juan Cellular, which even the majority concedes that it must follow if it’s applicable, is what you use to determine whether something is a tax. The argument becomes absurd: we need not apply the test used to determine whether something is a tax, because it’s not a tax.

Many people equate lotteries with “voluntariness,” but that avoids the key point: just because a purchase is voluntary, that doesn’t make the payment of tax voluntary. People voluntarily purchase liquor from state-owned liquor stores in North Carolina, but part of that payment still a tax (the state liquor tax). The 35 percent of lottery revenues that go to the general fund are above and beyond the fees necessary to run the program, and because the proceeds are used to benefit all North Carolinians, it is a tax.

More on the Heatherly case here.


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