January 19, 2007
Urging North Carolina Courts to Hold Lottery Is a Tax, Not a Fee—Heatherly v. State
North Carolina Court of Appeals No. 06-770
Filed on January 19, 2007
Argued on May 24, 2007
Decided on March 18, 2008
Summary
The North Carolina Court of Appeals is considering the case of Heatherly v. State, brought by the North Carolina Institute for Constitutional Law, a non-profit legal foundation. In a friend-of-the-court brief filed in the case, the Tax Foundation urged the Court of Appeals to reverse a lower court ruling and hold that the North Carolina Education Lottery generates tax revenue, not "profits."
The state imposes a 35-percent assessment on the sale of each lottery ticket, and if that revenue is found to be a tax under the meaning of North Carolina law, then the lottery's enactment in 2005 did not meet the basic legislative requirements for enacting tax law.
"A ruling that the lottery is in part a tax will uphold the meaning of Article II, Section 23 of the North Carolina Constitution by ensuring transparency in the state tax system," said Tax Foundation Senior Tax Counsel Chris Atkins.
According to the Tax Foundation brief, the lottery revenue meets all three tests for defining a tax. Current U.S. Supreme Court Justice Stephen Breyer laid out the criteria for defining a tax when he decided the San Juan Cellular case for the First Circuit Court of Appeals in 1992. Breyer argued that a judge should consider who imposes the assessment, who pays the assessment, and what the revenue is spent on.
In this case, the assessment was imposed by the North Carolina state general assembly, not a narrowly focused regulatory body; the assessment is paid by a broad swath of the public, not by a narrow group that benefits from a particular government service; and the revenue is spent on public education, a broadly available benefit, not on a single industry or similarly narrow group. All these facts argue for defining the lottery's net revenue as tax revenue, not as a fee or profit or other miscellaneous charge.
From the courthouse, Tax Foundation Tax Counsel Joseph Henchman reported that Judge James Wynn posed a hypothetical similar to one in the Tax Foundation brief: If the state took over all the gasoline stations in the state and operated them, would that convert the existing excise tax on gasoline into something else, "not a tax"?
"Judge Wynn seemed to be looking for the least disruptive way to find the lottery unconstitutional, which he felt could cause ‘chaos,' but didn't seem to be finding one from the state counsel," reported Henchman.
The Tax Foundation has long asserted that lottery revenue should be called tax revenue and that state lawmakers should never raise lottery revenue and simultaneously claim they "haven't raised taxes."
"Governor Easley did exactly that before the lottery's enactment, saying the state needed ‘a tax or a lottery,'" said Tax Foundation policy analyst Alicia Hansen, author of "Lottery Taxes and State Fiscal Policy," which lays out the Foundation's general principles for defining a tax in this area.
The opinion of the Court of Appeals.
Tax Foundation Press Release on the Court of Appeals decision.
North Carolina Court Says Lottery is Not a Tax; Strong Dissent, by Joseph Henchman, March 18, 2008
Court Considers Whether Lottery Is a Fee or a Tax, by Joseph Henchman, May 24, 2007
Tax Foundation Weights in on North Carolina Lottery Lawsuit, by Alicia Hansen, May 24, 2007
Misguided Court Rules That N.C. Lottery Is Not a Tax, by Alicia Hansen, April 3, 2006
