Playing the Odds Before It's Game Over: City has voted to tax sweepstakes cafes; state considers ban

The proliferation of Internet sweepstakes cafes has created a financial and ethical dilemma for municipal officials, as well as stiff competition for the business operators.

There are at least 51 known Internet sweepstakes business centers within Winston-Salem as of yesterday, city officials said. That's nearly 10 percent of the statewide total.

Here's how the centers work: A customer must buy a phone card or Internet-use card that carries, as a bonus, a chance to play the sweepstakes machines where they can win cash.

Many high-traffic retail areas seem to have at least one, some up to four. They tend to gravitate to strip malls with vacant, relatively cheap property.

"From a practical point of view, taxing the operations would bring a new source of revenue," said Michael Walden, an economics professor at N.C. State University. "The burden would likely be regressive, with lower-income users spending a higher percentage of their income in the effective tax."

The City Council voted in May to require business centers to pay a flat privilege-license fee of $2,500 and a fee of $500 for each machine they operate.

Based on the combined 922 machines at the 51 business centers, there could be about $588,500 in revenue toward the 2010-11 budget. Because 12 of the business centers had not declared how many machines they would use, the revenue could reach $700,000.

"We're not saying we're in favor of these Internet centers as a form of gambling," said Allen Joines, the mayor of Winston-Salem. "But, if they are going to exist, they should pay a privilege license fee."

However, the General Assembly could make that revenue stream dry up as soon as this year.

The N.C. Senate voted 47-1 yesterday to ban the sweepstakes games. There is expected to be more debate on the games in the N.C. House.

There are at least six business centers in the city with 40 or more machines, and another 14 with at least 30. The most is at Piedmont Cyber Center at 2800 Summit Square Blvd. with 45, which would require it to pay $25,000 in fees by June 30 for the next 12 months.

Tracy Golding, the co-owner of Northside Lanes at 3550 N. Patterson Ave., said that the business has eight machines "mainly as a courtesy to our customers who want to play before or after they bowl." He said that the machines are generating less than 5 percent of its revenue.

The uncertainty of whether the business centers will be allowed to exist has Golding debating whether to pay the combined $6,500 fee.

"There's no certainty that we would get a portion of our fees back if the legislature acts to ban the games," Golding said. "That's a lot of money for us to have hanging in the balance."

Joines said that the council likely would have to approve providing any refund to the operators on a prorated basis.

Winston-Salem is not the only municipality eyeing a revenue source from the centers.

At least 35 cities, as big as Raleigh and as small as Carolina Beach, have established privilege license fees. The annual fee cost in Elkin is $5,000 a location and $3,000 for each machine. In Wilkesboro, a center has a flat fee of $2,600.

William Thevaos, the president of the Entertainment Group of N.C., a lobbying group, said that it is hypocritical for the state to try to ban Internet sweepstakes centers while it sells lottery tickets.

"There is more than $500 million on the table in new revenue if the legislature would only regulate and tax it," Thevaos said. "If the lawmakers really want to clean up the video-gaming business, then they need to regulate it. We are asking for state oversight."

Joines said he has heard no criminal or public-disturbance concerns from law enforcement about the centers, many of which are open 24/7.

That's not surprising to Todd Eller, a manager at Coliseum Internet Center at 2804 University Parkway, next door to the Jimmy the Greek restaurant. "People tend to be in a good mood when they come here, in search of a relaxing pursuit rather than a pursuit of riches," Eller said.

The machines attracted a crowd of 10 players to El West Business Center on Peters Creek Parkway yesterday. One of them, Carlos Guerrero of Winston-Salem, said he would not play electronic games anywhere if the legislature bans them.

Guerrero said he likes to play the games about two hours a day.

"It is fun because you can play with very little money," he said.

rcraver@wsjournal.com | 727-7376

Journal reporter John Hinton contributed to this article.

Journal Graphic by Nicholas Weir - Click to enlarge