Court of Appeals Says Lottery Act Constitutional

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Court of Appeals Says Lottery Act Constitutional

Special Report - March 19, 2008
A divided three-judge panel of the N.C. Court of Appeals issued a ruling on March 18 upholding the constitutionality of the N.C. Lottery Act. The Court ruled that the Lottery Act was not a revenue bill and did not, therefore, have to comply with constitutional provisions requiring that revenue bills receive two recorded votes on two separate days in the General Assembly before they become law. All the parties to the lawsuit agreed in advance that the Lottery Act did not comply with Article 2, Section 23 of the N.C. Constitution, so the case turned on a legal question of whether the lottery raises money on the credit of the State, pledges the faith of the State for the payment of a debt, or constitutes a tax, any of which would make the lottery a “revenue bill” subject to the procedural requirements of Article 2, Section 23 of the Constitution. The North Carolina Family Policy Council and eight others are plaintiffs in the case against the State of North Carolina, the Lottery Commission, the Governor, the Executive Director of the Lottery and others.

Judge Wynn wrote the opinion for the majority, which consisted of himself and Judge Hunter, wherein he affirmed the Superior Court’s dismissal of the plaintiffs’ claims. He argued that the lottery does not raise money on the credit of the State or pledge the faith of the State for the payment of lottery winnings, because the Lottery Commission was established by statute as an “independent, self-supporting, and revenue-raising agency” and is separate from the State. He argued that lottery winnings could only be paid out of lottery ticket sale revenues, not out of general state revenues, because the language of the Lottery Act did not expand a winner’s right to recover winnings from any other State revenues.

Judge Wynn also concluded that the lottery does not impose a tax, because of the voluntary nature of participation in the lottery. He likened it to a toll, saying that: “A person uses a toll road at his option; if he does not use it, he pays no toll.” Judge Wynn said that the “revenue-raising purpose of the lottery is not the critical factor in determining if the Lottery Act imposes a tax.” Because buying a lottery ticket is voluntary, and is not levied or imposed on consumers, Judge Wynn concluded that it is not a tax. He distinguished it from a sales tax, because a sales tax is imposed on all members of the general population every time they make a purchase and is not voluntary. One who purchases a lottery ticket, said Judge Wynn, “receives the exclusive benefit of the right to a chance of winning the lottery prizes.”

Judge Calabria wrote a well-reasoned dissent emphasizing that because the legislature did not include language in the Lottery Act limiting lottery prizes to lottery revenues, it had raised money on the credit of the State and pledged the State’s credit for the repayment of lottery winnings. She said:

“By selling lottery tickets, the State is contracting with purchasers for the opportunity to have a claim for State revenues, but is has neither dedicated an exclusive revenue stream from which they are to be paid nor has it limited its liability to such a revenue stream. As such, a prize winner may assert a claim generally against the State and thus the State has pledged its credit for payment of prizes. This fact alone makes the Lottery Act a revenue bill for purposes of Article II, § 23.”

Judge Calabria also criticized the majority for using the wrong test—the voluntary nature of purchasing a lottery ticket--to determine whether the lottery imposes a tax. She noted that the N.C. Supreme Court has adopted a three-pronged test that was met in this case, making the 35% net revenues allocated to the State by the Lottery Act a tax. She reasoned: “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….(“An assessment imposed upon a broad class of parties is more likely to be a tax….”)…Third, the purpose of the assessment is to raise revenue for education programs which is a ‘general public purpose’.” She distinguished the lottery tax from tolls and liquor fees, because those fees are generated to provide the service from which they are generated. She concluded the Lottery Act is unconstitutional, because it’s primary purpose is to raise general revenues, which makes it a “revenue bill” subject to Article 2, § 23 of the State Constitution.

Since the Court of Appeals was divided, the plaintiffs have the right to appeal the decision to the N.C. Supreme Court. North Carolina Family Policy Council attorney Tami Fitzgerald said, “The Constitution requires that new taxes be enacted by our General Assembly only upon the deliberation afforded by two separate votes on two separate days, not hastily rammed through. It is clear that the purpose of the lottery is to raise revenue for the general benefit of the citizens of North Carolina and is therefore a tax. We are disappointed that the Court of Appeals did not choose to make the General Assembly accountable to follow the Constitution.”