Businesses question fees for Internet cafes (Fayetteville Observer)
A lawyer says Fayetteville’s “oppressive” fees on sweepstakes lounges are designed to close them and might be challenged in court.
“You can’t tax something out of existence,” said Lonnie Player Jr., a Fayetteville lawyer representing owners of the lounges.
The city intends to charge each owner a “privilege license” of $2,000 per location and $2,500 per computer terminal. For some locations with dozens of video gambling machines, the bill can run more than $100,000.
The city says the bills will be due Sept. 1, even though the machines will become illegal Dec. 1 under legislation that Gov. Bev Perdue signed into law Tuesday.
Player says courts have ruled on a case-by-case basis that excessive taxes or fees are punitive and unfair. He likened Fayetteville’s fees to zoning adult entertainment out of business – a practice the U.S. Constitution forbids.
Sweepstakes Internet cafes have sprung up all over North Carolina as a loophole to a state ban on gambling in 2007. They’re in bars and lounges and gas stations and strip malls. Customers buy Internet time to use the computer terminals for chances to win sweepstakes that can be redeemed for cash.
Several communities have begun taxing the industry. The fees vary. So do the communities’ intentions for collection.
Hope Mills adopted the same fees as Fayetteville in June. On Monday, town officials decided they would discount those fees by almost 60 percent because of the impending ban. In other words, they would charge for five months starting in July. Bills will go out in August.
Mike Bailey, Hope Mills’ chief building inspector, said the decision was made after a consultation with Town Attorney John Jackson.
“We felt that it was a better way of doing it, since they will no longer be able to operate after Dec. 1,” Bailey said. “It would be unfair to charge them for a whole year when we know they are not going to be in business past Dec. 1.”
Spring Lake’s newly adopted fees are $500 per location and $300 per terminal. Mayor Ethel Clark said officials might not charge the full amount, but a board decision has not been made.
Fayetteville City Attorney Karen McDonald has taken a different stance. She told the City Council last week the city can charge the fees because the businesses have not been banned yet. She said businesses are not refunded privilege license fees after they close.
How much the city intends to collect is not certain, but one city official this month pegged the figure at $1.2 million. The anticipated revenue was not used to balance the new budget, so the council will need to decide what to do with the money.
On Sunday, Mayor Tony Chavonne told the City Council in a weekly e-mail update that he would like to use the extra money to annex Shaw Heights, an impoverished community along Murchison Road next to Fort Bragg.
“As you recall, there were some upfront costs associated with the annexation,” the mayor’s e-mail said. “The area should have been annexed years ago and lies directly on a major new corridor directly between our city and the military base.”
Irked business owners
Owners of the sweepstakes lounges point to Fayetteville’s wide discrepancy in privilege license fees as evidence they are being overcharged.
For “topless entertainment,” the fee is $100 a year and $25 per peep-show machine. At cinemas, the owner pays $200 per movie screen; others pay $5 per electric video game. Fortunetellers have to pay $1,000.
The business owners also complain they were given little notice. Fayetteville officials first publicly discussed them in June.
When Ann Drabek went to City Hall on June 28 to apply for a privilege license, she was unaware of the fees. She wanted to open a second sweepstakes lounge in Fayetteville. Her first one, Lucky Charm Internet Cafe, opened in Hope Mills last fall.
She noted on her Fayetteville application that her business would involve “phone time sales” and “sweepstakes.” She said a city employee in the Finance Department, after a check with the zoning rules, told her to strike out “sweepstakes” from the application and, according to her receipt, she paid $100 for the privilege license.
The City Council adopted the fees, along with a new budget, that same evening of June 28.
On July 9, Drabek opened her Lucky Charm location on Ireland Drive in Fayetteville. Inside, 28 black-paneled machines with blinking screens greet customers. They are offered free snacks and sodas or bottled water. They can play blackjack and variations of poker or watch cherries and diamonds spin around on the screen.
Another 15 machines stored in back rooms are not ready for the public, Drabek said. They have to be programmed and outfitted to meet North Carolina law, she said.
Fayetteville doesn’t care.
Someone from the city stopped by last week to do an inventory and told Drabek that all 43 machines would be counted. She expects to get a bill for $109,500 from the city soon.
“It’s an absurd amount of money they are trying to charge us,” she said.
Drabek, a commercial real estate agent, said she never would have opened a second sweepstakes lounge in Fayetteville had she known about the fees. Drabek knew last month that legislators in Raleigh might ban the machines, but she didn’t want to wait for the state to act, she said.
Chris Marion, who operates Crazy Hank’s in a strip mall on Strickland Bridge Road, said Fayetteville’s fees were designed to drive him and most others out of the business. His bill will be about $50,000 for his business, which he opened in May.
“Once the state passed the law, I thought that was the end of it,” he said. “I never would in a million years think the city would try to extort $50,000 from a business that has to close in five months.”
He said his sweepstakes lounge is turning a profit, but he doesn’t want to pay that kind of bill.
“I think the city thinks these things are cash cows,” he said. “For the new guys like us – we are pretty small – it’s not doing what we thought they would do.”
Player said he got involved this spring on behalf of the industry, talking to town officials in Calabash, Clinton, Laurinburg and other places where the fees were being considered. He said he has persuaded some towns to forgo the fees and others to substantially reduce them.
Player said the fees raise constitutional questions and run afoul with a law giving the federal government exclusive authority to tax the Internet. But his clients want to be practical.
“They welcome regulation,” he said. “They just didn’t welcome oppressive regulation.”
Staff writer Andrew Barksdale can be reached at barksdalea@fayobserver.com or 486-3565.
Published: 12:23 AM, Wed Jul 21, 2010
By Andrew Barksdale
Staff writer
