Barely legal: reincarnation of video gambling continues on borrowed time pending court challenge

It’s early on a workday, and there’s a single player seated at one of the 18 machines in the two-room M&J’s sweepstakes café, located in a small strip mall on Highlands Road in Franklin.

Louise Dills, who works at the nearby manufacturing plant Whitley Products, has casually dressed for the time she’ll spend here. The Macon County native was wearing a sweat suit, T-shirt and tennis shoes, her typical sweepstakes attire. She was playing her favorite sweepstakes game: “Candy Money.”

M&J’s is one of more than 1,000 sweepstakes cafes that have sprung up statewide, despite a ban by the General Assembly on video gambling. Dozens are here in Western North Carolina.

Sweepstakes cafes such as this one sell “time” to customers to gamble online or by cell phone. Customers, in return for whatever amount of money they care to risk, log on to their machine of choice and play for the allotted time they purchased.

Sweepstakes café owners and managers argue that letting customers “find” cash and prizes via computers is simply buying and selling Internet or phone time — not real gambling, in other words.

Dills has defied the odds, in her accounting at least. She said she’s won more money at the games than waved goodbye to. Dills won $5,800 playing Candy Money a few weeks ago. It isn’t a hard game to master, she said, putting down a cigarette into an ashtray to free her hands and visually explain the game. You simply match identical items on the screen. They match; you win, she said, pointing at the screen.

“I’ll probably never win that much again,” Dills said of that blue ribbon day. “But I really play just to take a break.”

That break could end for gamblers such as Dills if the state of North Carolina has its way. Sweepstakes cafes such as this one are in the crosshairs.

The General Assembly first banned video gambling in 2007. It didn’t take long before so-called “sweepstakes” cropped up as an alternative. Lawmakers viewed the sweepstakes as a reincarnation of video gambling under a different name, designed to circumvent the previous ban. So the General Assembly went back to the drawing board and passed another ban in 2010 aimed at putting sweepstakes cafes out of business as well — the third attempt in an ongoing game of cat and mouse between the state and video gambling industry.

But the situation didn’t turn out as black and white as lawmakers had anticipated. Lawsuits challenging the ban have allowed the games to continue, leaving local law enforcement officers confused about whether sweepstakes machines operating in their counties are illegal or not.

And, meanwhile, owners of sweepstakes cafes are arguing that any attempt to close them down is a violation of free speech rights under the First Amendment — the basis of the pending lawsuit.

“There are some people who have gambling problems,” said Melissa Hurst, the owner of M&J’s in Franklin. “But what is the difference between us doing it here, and the casino being right over the mountain?”

Or, for that matter, sweepstake proponents argue, what’s the difference from sweepstakes machines in parlors and the state-endorsed, state-managed education lottery?

The sweepstakes cafes are a helpful, if not always fully embraced, revenue source in towns such as Franklin. The municipality charges a $50 business licensing fee and a $2,600 sweepstakes fee. The towns of Canton and Maggie Valley levy comparable fees on businesses operating sweepstakes machines.

In Franklin, it adds up to about $10,000 a year in revenue for the town, according to Franklin Finance Officer Janet Anderson.

And that’s just for four sweepstakes cafes located in the town limits; there’s many more operating outside those boundaries in greater Macon County. The county, however, doesn’t levy specific fees for these types of businesses.


‘Confusing law’

Law enforcement officers in Macon County, and in most of the state, have taken a hands-off approach to the sweepstakes cafes.

“We’ve been advised by the state Attorney General’s office not to enforce the law,” Macon County Sheriff Robbie Holland said. “It’s a very confusing law. We know there are people potentially abusing it, but the AG did not want us to prosecute any cases until they have a ruling.”

The state Court of Appeals held oral arguments last month on two lawsuits challenging the state’s sweepstakes ban but has not issued a ruling. The cases were first heard by lower-level courts, with those judges issuing mixed reviews on the 2010 law.

One judge upheld the entire law to ban the machines. Another judge struck down part of the law and allowed that certain machines could operate legally but also agreeing to the Free Speech argument in certain other cases.

“We have to keep watching the law, because it keeps changing,” M&J’s Hurst said.

Christy Wilson, who works in a nearby sweepstakes café owned by the same family, agreed with Hurst.

“You’ve got to make sure you’re up to date,” Wilson said.

The Buncombe County sheriff was one of the few in the state who was enforcing the state law banning sweepstakes machines. Buncombe, perhaps, has a lower tolerance for the offshoot of video gambling. Its former sheriff went to jail for his involvement in an organized crime ring centered around video poker.

After charges against those operating the sweepstakes machines were dismissed in Buncombe County court because of the pending lawsuit, the sheriff announced this month that he would suspend action against sweepstake operators.

Running sweepstakes cafes come at potential costs in the community to these business owners and workers included.

“There’s a lot of people who look down on it,” Hurst said.

Leaving possible moral implications aside, Sheriff Holland’s deputies in actuality respond to very few calls at or from the local sweepstakes cafes.

“There are few to zero problems at the establishments where these machines are set up,” Holland said.

Senate clamps down on sweepstakes

If Rep. Ray Rapp has his way, the state House will crush video sweepstakes as fervently as the state Senate did late last month.

N.C. senators voted 47-1 to ban the video gambling machines that have evolved to circumvent a statewide ban. Court battles waged by the gaming industry had previously stalled new legislation to outlaw video sweepstakes.

The ban proposed in the House would go into effect Dec. 1. Towns like Maggie Valley, Franklin, Canton and Hendersonville would no longer be able to charge the $2,500 or more annual licensing fees on the newly illegal businesses.

Rapp, D-Mars Hill — who has been a major opponent of video gambling all along — looks forward to finally voting against sweepstakes in the House.

“It’s spreading like a contagion, and it’s got to be stopped,” said Rapp. “This puts an exclamation point on the fact that it’s an illegal activity.”

Sen. Joe Sam Queen, D-Waynesville, wholeheartedly supported a total ban on sweepstakes machines when it came to a vote in the Senate.

“These parlors are nothing more than unregulated casinos operating outside the law,” said Queen. “I listened to all sides, but stand firmly with the sheriffs and police chiefs across the state who asked us to tighten the law because of the increase in crime and high social costs that come with these illicit operations.”

Rapp cited a desperate woman in Marshall who robbed a Wachovia Bank after running up debt at two video sweepstakes places.

Rapp also pointed out that the machines are predominantly found in poor neighborhoods. According to a survey conducted in Florida, the majority of people who play earn less than $30,000 a year or are retirees.

But the gaming industry — which previously denied that internet sweepstakes were at all related to video gambling — argues now that regulation is the key. It would protect customers and create accountability for businesses.

“[Taxation] would provide more than $500 million a year in revenue according to recent figures released by the N.C. Lottery,” said William Thevaos, president of the Entertainment Group of North Carolina. “Lawmakers know there’s a pot of money there if they would just regulate it and tax it.”

Rapp has hardly been won over by the argument.

“If an activity’s wrong, you don’t do it,” said Rapp, adding that most people would not advocate making other illegal activities permissible simply to generate revenue.

Rapp said out of frustration, he has sometimes considered resorting to what his attorneys term the “nuclear option” — banning sweepstakes of all kinds.

“Every time we try to do this surgically, and sit there with our lawyers, it’s a challenge,” said Rapp. “[But] cooler heads prevailed.”

Maggie debates how steep is too steep for cyber sweepstakes fees

Business owners with cyber sweepstakes machines in Maggie Valley received both good and bad news last week.

Luckily for them, the town board passed a much lower business license fee than originally proposed and delayed the pay-up date till July, which marks the beginning of the next fiscal year.

However, the annual fees passed are still sky-high: $2,500 for the first four machines and $750 per machine thereafter. Though Maggie Valley’s town board already passed zoning restrictions on the machines, it had yet to settle on an annual fee.

The planning board was tasked with developing a fee, but was sent back to the drawing board twice by aldermen. The planning board first proposed a $2,400 fee per machine, then revised their suggestion to $2,000 per machine.

Both options were too high for the aldermen’s tastes, but the planning board saw things differently.

“We just strongly felt that we didn’t want it to proliferate through town,” said Billy Brede, chairman of the town planning board. “We presented the ordinance that we felt would protect the town.”

Cyber sweepstakes is a close relative of video poker that allows players the chance to win phone and Internet time that can be traded in for cash. Sweepstakes machines are able to subsist due to a loophole in the state’s video gaming ban.

Brede said limiting cyber sweepstakes machines is important to preserve Maggie’s family-friendly environment, something that Brede says is important to both locals and visitors.

“People who come here for tourism are looking for family values,” said Brede. “We have strong family values, and we don’t want to see gambling proliferate.”

Alderman Colin Edwards said while the planning board works hard to make its decisions, the aldermen thought the fees it proposed were excessive and might risk shutting down businesses.

“I don’t approve of gambling, but I don’t want to see anybody go out of business, either,” said Edwards. “The General Assembly will probably be addressing this issue anyway in this next coming session, so it might not even matter what we do.”

Aldermen Phil Aldridge and Saralyn Price were not present for the vote, but the three remaining members voted unanimously for the measure.

Since some businesses opted for the machines to stay afloat during the severe recession, both the planning board and the town board agreed that the fees shouldn’t be implemented until July.

“The board didn’t want to penalize those businesses who had taken up those ventures during these tough economic times,” said Nathan Clark, the town planner.

Businesses could save up for the fee in the meantime, and perhaps even rethink their decision to harbor sweepstakes machines, Clark said.

“We didn’t want to start billing people in the middle of the year,” said Tim Barth, town manager of Maggie Valley. “We didn’t think that was appropriate.”

The towns of Canton and Franklin passed comparable fees to what Maggie ultimately settled on, but didn’t hesitate to begin collecting immediately.

According to the town’s last count, there are 10 machines within three businesses in Maggie Valley. Barth said it’s unlikely that the town has identified all locations, however.

This and That Home Décor and Gift Shop, which housed four of these machines, seems to have closed its doors.

For now, each business must pay a nominal fee of $10 to register cyber sweepstakes. It’s the same fee the town collects for pinball machines or video game machines — clearly a whole different ball game.

“No matter how good you are at’s never going to shell out $500 or $5,000,” Clark said.

Canton joins trend of imposing steep fees on video sweepstakes outlets

The Town of Canton has begun clamping down on video sweepstakes machines with a new ordinance last week, but some business owners seemed more relieved than disappointed.

That’s because the ordinance ends the 90-day moratorium passed in November and clears the path for even more sweepstakes machines in town.

Cyber sweepstakes use an obscure loophole in the video poker ban to subsist. The video gambling industry claims winnings are predetermined — even though customers appear to play games of chance, similar to those on video poker machines.

Canton’s new policy calls for a steep $2,500 annual tax on the first four machines, with $700 per machine thereafter.

It requires each business to pull in no more than 15 percent of its income from cyber sweepstakes and demands minors be prohibited from playing or even viewing the screens.

While no one spoke at Canton’s public hearing on the ordinance last Tuesday (Jan.12), a few video sweepstakes representatives were present. One was so eager to get the machines up and running, he wanted to pay the fee on the spot that night. Town Manager Al Matthews instructed him to be patient and come in the next morning.

So far, two businesses have signed up for the privilege license. Lankford’s Grocery registered 19 sweepstakes machines, while Crosby Wireless registered six.

Annually, these two businesses alone will hand over $16,900 to the town. For now, Canton is only charging half the annual fee to cover the remainder of the fiscal year through June. Come July, a full year’s worth will be due.

Canton Alderman Eric Dills was noticeably displeased even though he voted for the measure, which passed unanimously.

“I don’t really like this business,” said Dills. “It is gambling and everybody knows it’s gambling.”

Dills pointed out there’d be no concrete way to determine if a business was raking in more than 15 percent of its profits from sweepstakes.

Mayor Pat Smathers said the town would have to use a common sense approach.

“If you have 15 of those machines and a hot dog stand, chances are you don’t sell that many hot dogs,” said Smathers.

The towns of Hendersonville and Franklin have already set a $2,600 annual tax on sweepstakes machines. Franklin collected fees from eight businesses within days of passing its ordinance, a testament to the lucrative nature of the industry.

Video gambling industry undeterred by steep fees for “sweepstakes” machines

The North Carolina Court of Appeals recently upheld a state law that bans video gambling everywhere but the casino in Cherokee.

The video gambling industry challenged the ban, claiming it was unfair to outlaw the machines statewide while allowing them at Harrah’s Cherokee Casino. The court, however, ruled that the exemption is a policy decision and does not violate federal law.

Meanwhile, video sweepstakes machines are quickly proliferating around the state as the industry capitalizes on an apparent loophole in the law. Video sweepstakes are largely a reincarnation of video gambling under a different name and are the subject of a separate lawsuit that is still pending.

Towns are enacting a steep business license fee for the machines as a stopgap measure. But it doesn’t appear to be a deterrent.

Since Franklin instituted a $2,600 annual fee in December, eight vendors have paid the fee to open their doors.

Franklin Town Manager Sam Greenwood said business owners probably realized the venture was lucrative enough to justify paying the hefty fee.

Greenwood suspects that the new policy could push cyber sweepstakes outside of Franklin and into county territory. No county policy has been put in place to regulate the machines.

The Town of Canton held a public hearing on Tuesday, Jan. 12, on its own ordinance on sweepstakes machines. The proposed amendment calls for a $2,500 privilege license fee for the first four machines, with $700 for each additional machine. It also includes a zoning ordinance limiting machines to four business districts. In addition, the measure calls for income from sweepstakes terminals to not exceed 15 percent of the total gross income of the business.

Canton Town Manager Al Matthews estimates that about eight establishments in Canton currently operate sweepstakes machines.

Towns use fees, restrictions to push back against video gambling look alike

Local governments have begun the process of regulating cyber sweepstakes machines, which are multiplying rapidly across Western North Carolina.

The responsibility for regulating cyber sweepstakes has largely been left in local governments’ hands until a consensus is reached at a state level on whether these machines akin to video gambling should be legal.

The Town of Franklin passed a measure last week that would require businesses with sweepstakes machines to fork over $2,600 each year for a business license.

Franklin Town Manager Sam Greenwood said one of the town’s main goals is to locate all businesses that operate cyber sweepstakes machines. For now, each business can have up to 4 cyber sweepstakes machines.

Greenwood said cyber sweepstakes are so profitable that a $2,600 annual fee is not excessive.

“Looking at the profit ratio return, it doesn’t seem to be that much after all,” said Greenwood.

Greenwood said the town wanted to stay away from regulating the machines and treat the issue from a licensing standpoint. But the fees do serve another purpose.

“It’s an expression of the town’s displeasure with having them,” said Greenwood.

Meanwhile, Maggie Valley’s planning board unanimously recommended restrictions on cyber sweepstakes be inserted into the town’s zoning ordinance. The town board of aldermen must approve the amendment before it can be put in place.

As the planning board’s amendment stands, the machines must be at least 500 feet away from dwellings, 1,000 feet away from any other business with cyber sweepstakes, and 1,000 feet away from schools, religious institutions, libraries, daycare centers and public parks.

The ordinance also states that there must be at least 1,000 square feet of indoor space per machine. The requirement prevents a small storefront from housing nothing but a series of video gaming machines, since each machine would require floor space equivalent to a typical one-bedroom apartment.

A 90-day moratorium on new cyber sweepstakes machines is still in effect in Maggie until the board passes the new regulations.

Maggie Planning Director Nathan Clark said he’s not ruling out the possibility of charging a fee in the future, but amending the zoning ordinance is the bigger priority for now.

“It’s more to the heart of what the moratorium was about,” said Clark.

If passed by the town board, the amendment would not apply to businesses that already operated cyber sweepstakes machines before the moratorium was passed.

However, these businesses would be affected if they expand operations.

The Town of Canton also has a 90-day moratorium on sweepstakes machines in place, but it has yet to approve any regulations.


How we got here

A loophole in the video poker ban has allowed cyber sweepstakes to proliferate across the state. The gaming industry’s new formula has so far been successful in bypassing every restriction that has originated in the state legislature.

A Superior Court judge in Guilford County issued a preliminary injunction, prohibiting law enforcement officers from taking any action against the machines until state law is clarified.

The judge even banned law enforcement officers from stating publicly that the machines are illegal.

Earlier this year, a Wake County Superior Court judge ruled that prohibiting electronic gaming statewide while allowing the Eastern Band of Cherokee Indians to operate the games was unconstitutional. That ruling has been stayed pending appeal.

While cyber sweepstakes are similar to video poker, they do not directly involve cash. Customers buy a phone or Internet card, or enter a contest for the chance to play at the sweepstakes terminal for free.

They have the option of swiping that card on the sweepstakes machine to play games of chance. Playing those games will allow them to see how much phone or Internet time they’ve won by buying the card. Customers have the option of then cashing in the phone or Internet time they’ve won for money.

Loophole in video poker ban makes way for cyber sweepstakes

Sweepstakes have never before been so controversial — or so complicated.

Far removed from the days of dropping an entry form in the mail or peering under the cap of a soda bottle, sweepstakes have now taken the form of electronic gaming machines.

Though these sweepstake terminals seem closely related to video poker to most observers, the gaming industry maintains that nothing could be farther from the truth.

A Superior Court judge in Guilford County supported that claim last December, ruling that a state ban on video poker did not apply to sweepstakes terminals.

The judge issued a preliminary injunction, prohibiting law enforcement officers from taking any action against the machines or even stating publicly that these machines were illegal.

Differentiating sweepstakes machines from video poker has been critical for the gaming industry.

The state ban targeted video poker after public figures, like former House Speaker Jim Black and Buncombe County Sheriff Bobby Medford, were accused of accepting bribes for allowing illegal video poker operations.

The gaming industry’s new formula has so far been successful in bypassing every restriction that has originated in the state legislature.

While state legislators weigh the pros and cons of passing yet another ban, one that includes sweepstakes machines, local governments, like those in Canton and Maggie Valley, have taken up the task of reigning in these virtually untaxed, unregulated machines.

Canton and Maggie Valley have both instituted 90-day moratoriums on the installation of the machines to research and draft some guidelines.

After enacting its own moratorium, the city of Hendersonville decided to charge $2,600 per machine.

For now, Maggie Valley charges a mere $5 per machine, while Canton’s ordinance allows for no more than three electronic games to be installed at each business. Those who violate that rule in Canton face a $50 per day fee.


Containing explosive growth

Maggie Planning Director Nathan Clark decided to investigate after receiving a phone call alerting him that several sweepstakes machines were being moved into a new store in town.

Steve Sullivan, a co-owner of This and That Home Décor and Gift Shop, said he felt targeted by the scrutiny.

“Everybody is trying to say it is video poker, but it is totally different,” said Sullivan.

Sullivan’s store, which sells seasonal merchandise, also offers phone card sweepstakes. A lit sign declaring, “Cyber Sweepstakes are here,” decorates the storefront.

According to Sullivan, Clark and Alcohol Law Enforcement officer Doyce Stevens grilled him about the terminals, told him to move them into the back room, and demanded an inventory list to ensure that he would sell other merchandise at the store.

Sullivan said he felt like he had to jump through hoops just to get a business license.

Meanwhile, Clark said that there was never any question that Sullivan would receive his business license since no policies on sweepstakes machines had been in place when Sullivan applied.

Clark maintains that he was simply trying to figure out the difference between cyber sweepstakes and video poker, which is illegal.

“We were trying to figure out exactly what this entails,” said Clark. “I understand the frustration in getting started, but the town has an obligation to see uses that are proper and allowed.”

While Sullivan said he was never notified of a special meeting called to address the sweepstakes issue, Clark said the meeting was advertised and did not deal specifically with Sullivan’s business license.

The town board called that meeting to discuss the broader question of regulating sweepstakes machines. The board decided to institute a 90-day moratorium on the machines, which started Nov. 6.

The moratorium had no impact on Sullivan’s store.

Clark said the moratorium would give the planning board time to research the issue and come back to the board with ideas, hopefully by January or February 2010.

What Sullivan wants is consistency in the town’s policy, citing that cyber sweepstakes terminals were installed in two gas stations in town without any scrutiny.

“I had to fight for my business license,” said Sullivan. “They didn’t want me to have them, but they have them in the convenience stores. It’s no different.”

Sullivan keeps a highlighted copy of a Superior Court judge’s decision by his side to immediately dispel any doubts about his sweepstakes terminals being legal.

Without commenting on the machines’ legality or morality, Clark said they should be regulated. The machines could be troublesome for a town like Maggie due to the abundance of vacant storefronts combined with an “extremely low lease rate,” Clark said.

“You could have a situation where your town is overrun by an industry,” said Clark.

The town board and staff had heard murmurs about cyber sweepstakes at statewide meetings in the past, but they were not aware that cyber sweepstakes had crept into their own town’s borders until recently.

Clark said he wants to make sure the zoning ordinance keeps up with the machines, noting that they have become a wide-ranging problem and taken over entire city blocks in the eastern part of the state.


No magic ordinance

Al Matthews, city manager for Canton, said the town had received applications for an “office and Internet business,” not realizing that the bulk of the business was actually tied to sweepstakes machines.

Matthews said such terminals could be found in convenience stores, gas stations, and even a clothing store in town.

Since the moratorium was put into place in October, the town has considered taxing either the game or the business, or restricting it to specific zones.

While many local governments are addressing the same sweepstakes issue, each town is searching out its own path.

“I don’t know that anyone has a magic ordinance yet,” said Matthews.

Matthews is not sure what the new town board will decide on the issue after it is sworn in, but it was clear to him that no one in the current town board was a strong advocate for the machines.

If Canton institutes high fees for installing the machines, Matthew said the motivation would stem from a desire to discourage the games rather than to generate revenue.

“The average citizen would say this is a form of gambling,” said Matthews. “But this, according to law, is not gambling. We have to address it as a non-gambling issue no matter what people want to call it.”

Matthews said while the town cannot control their citizen’s choices, the board is nonetheless concerned about a proliferation of the machines.

Meanwhile, Waynesville is waiting on a decision by the state, hoping that legislators will fix whatever was wrong with the statute to begin with.

“We’re not thinking about it right now,” said Waynesville Town Manager Lee Galloway.


Playing whack-a-mole

Earlier this year, a Wake County Superior Court judge ruled that the state’s ban on video poker was unconstitutional since it allowed the Eastern Band of Cherokee Indians to operate the same games it outlawed elsewhere in the state.

The N.C. Court of Appeals is still mulling whether the ban is constitutional, creating a major grey area for enforcement agents trying to uphold it.

N.C. Rep. Ray Rapp, D-Mars Hill, said he supports every effort to discourage sweepstakes machines across the state. He hopes to usher them into an improved electronic gaming ban that would not apply to the Eastern Band.

“It is a sovereign tribe,” said Rapp. “What I’m proposing on this ban does not affect in any way gaming on the reservation.”

When it comes to the video gaming machines, Rapp’s patience is wearing thin.

“It is a blight on this state,” said Rapp. “And the problem is that it’s like an infection that is rapidly spreading from one end of the state to the other...While courts are taking it under consideration, they’re just shipping in the machines.”

Rapp is frustrated that the laws passed in the state legislature have not stopped the spread of cyber sweepstakes, but he said that anyone who attempts to fight the games is picking on an industry with deep pockets that will stop at nothing to legalize their games.

Rapp likened the quest for banning video gambling to playing whack-a-mole.

“When you get one game taken care of, another one pops up. You get that one, they come up with another one,” said Rapp. “Any way they can circumvent the law, they will do it.”

While Rep. Earl Jones, D-Greensboro, has suggested legalizing sweepstakes machines and having the state take a cut of the profits, Rapp remains unconvinced.

“I think it’s truly exploitative and inappropriate,” said Rapp, who also opposed the state lottery being put into place.

“It is a shame what’s happening,” said Rapp. “You got a lot of people leaving their Friday afternoon paychecks at their stores and not being able to fed their families. The people who are most vulnerable economically are the ones that are playing these games.”


How they work

Customers buy a phone or Internet card, or enter a contest for the chance to play at the sweepstakes terminal for free. They have the option of swiping that card on the sweepstakes machine to play games of chance. Playing those games will allow them to see how much phone or Internet time they’ve won by buying the card. Customers have the option of cashing in the phone or Internet time they’ve won for money.

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