Lottery at stake in lawsuit

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.