Please ensure Javascript is enabled for purposes of website accessibility
Home / Courts / Municipal – Privilege License – Internet Sweepstakes – Dramatic Fee Increase

Municipal – Privilege License – Internet Sweepstakes – Dramatic Fee Increase

IMT, Inc. v. City of Lumberton (Lawyers Weekly No. 12-07-0206, 27 pp.) (Robert N. Hunter Jr., J.) (Robert C. Hunter, J., dissenting) Appealed from Robeson County Superior Court. (Robert Frank Floyd Jr., J.) N.C. App. Full-text opinion.

Holding: Several Lumberton businesses sell internet usage time to customers, and their customers also receive free sweepstakes entries with their internet-usage time purchases. The businesses have failed to show that the Town of Lumberton acted improperly when it dramatically increased the cost of a privilege license for these businesses (and not for other types of businesses).

We affirm summary judgment for the town.

‘Games of Chance’

The appellant-businesses argue they do not operate “games of chance” as required by the ordinance because their prizes are predetermined. However, the ordinance clearly states that the tax applies regardless of whether “the value of such distribution is determined by electronic games played or by predetermined odds.”

Moreover, the ordinance on its face defines “games of chance” to include sweepstakes, whether or not the resulting prize is predetermined. Therefore, pursuant to the clear language of the ordinance, we hold the ordinance applies to appellants because they conduct games of chance.

Even though appellants offer free sweepstakes entries by mail, nowhere does the ordinance require payment for every sweepstakes entry; the plain language of the ordinance simply requires that such an establishment “have as a part of its operation” games requiring payment. Therefore, we hold the ordinance applies to appellants because they accept payment in exchange for customers’ use of computers that conduct games of chance.


Under G.S. § 160A-211, the city has the authority to levy privilege license fees, imposed for the privilege of carrying on a certain business. Property is often used to carry on a certain business, and when the privilege of carrying on that business is taxed, the tax may also be levied on the property used to carry on that particular trade, profession, or business.

Such a tax on the property is not considered a separate property tax but is incidental to the tax on the privilege of conducting a certain business. Basing a privilege license tax on the units of property a business has is common and will not invalidate a privilege license fee ordinance.

The city is not taxing individual computer terminals for the sake of taxing computers. The city is taxing businesses for the privilege of carrying out cyber-gambling through the use of computer terminals, and we hold such a tax is authorized by G.S. § 160A-211.

The city is taxing the business activity of cyber-gambling that uses computer or gaming terminals to carry on the business. Any tax on the computer terminals is incidental to the main purpose of the privilege license fee: to tax the privilege of conducting the particular business of cyber-gambling. With this understanding, we hold the tax to be uniform, as it applies to every single cyber-gambling establishment that uses computer or gaming terminals to carry on its business.

Appellants argue the ordinance unlawfully exempts from taxation lotteries endorsed by this state that also conduct “games of chance.” However, there is no requirement that the city levy a privilege license tax on all particular trades; it may levy the tax based on classifications within a particular class of the trade.

The N.C. lotteries are distinct businesses that would not be legal without the state’s endorsement. The only lotteries endorsed by the state are those whose net revenues are transferred to the state’s Education Lottery Fund. G.S. § 18C-164. Appellants’ games of chance do not provide net revenues to this fund. Therefore, the state-endorsed lotteries reasonably constitute a separate classification from appellants’ unendorsed legal businesses, and the city’s privilege license tax need not be imposed upon them.

In support of their disparate tax treatment argument, appellants refer to a list of other businesses subjected to a privilege license tax by the city and note that they are assessed fees of $500 or less, while cyber-gambling establishments are charged $5,000 per location and an additional $2,500 per gaming terminal within the location.

To compare the privilege license tax amount appellants are subjected to with the amounts incredibly distinct businesses are subjected to and to claim disparate tax treatment requiring a rational basis is an invalid and misleading argument that we reject.

To be just and equitable, a privilege license tax must not be so high as to amount to a prohibition of the particular business. The fee may be higher for more profitable businesses.

Appellants provide no evidence that the city’s privilege license tax would completely deprive them of all profit associated with their businesses. There does not appear to be a sufficient record of proof to show governmental action was taken to deprive appellants of a constitutional right.

The record is devoid of evidence of the profits, net revenues, regulation, and cost thereof for appellants’ businesses before and after the privilege license tax was instituted. Nor was any evidence presented regarding the territory and target population of appellants’ businesses. The only evidence appellants presented is the new amount of the privilege license tax on appellants’ businesses in comparison to the privilege license tax on appellants’ businesses in previous years as well as in comparison to the privilege license tax on other businesses. Such evidence does not prove the tax’s invalidity.

Because appellants presented no additional evidence that the privilege license tax was prohibitive on their particular businesses, appellants’ argument is dismissed. We emphasize that we find the city’s privilege license tax here constitutional only because factual elements are missing to prove the city’s privilege license tax is prohibitive.

Finally the Internet Tax Freedom Act provides, “No state or political subdivision thereof shall impose any of the following taxes during the period beginning November 1, 2003 and ending November 1, 2014: (1) taxes on internet access. (2) multiple discriminatory taxes on electronic commerce.” ITFA § 1101(a), 47 U.S.C. § 151.

First, the tax at issue here is not a tax on internet access. The tax is a fee a business must pay for providing games of chance through the use of a gaming terminal. The gaming terminals happen to be computers that provide access to the internet. Not once does the ordinance describing the tax even mention internet access; it is just happenstance that appellants’ gaming terminals providing games of chance also provide access to the internet.

Thus, the privilege license tax is not a tax on internet access. Next, the ordinance does not impose multiple discriminatory taxes on electronic commerce.

The ordinance never mentions “internet-based” sweepstakes or makes a distinction regarding electronic commerce; it only imposes the tax for cyber-gambling establishments that use a computer or gaming terminal in provision of games of chance. Thus, we hold the privilege license tax enacted by the ordinance does not violate the ITFA.



(Hunter, J.) Our courts may declare a municipal ordinance levying a license tax on business invalid on the ground that the tax imposed is so oppressive and unreasonable as to amount to confiscation, rather than taxation.

Here, the ordinance imposes a license tax that is between 6,000 and 11,000 times higher than the tax imposed on appellants in the previous year. This is in stark contrast to the modest annual license tax imposed on any other business.

The discrepancy between the tax imposed by the ordinance upon cyber gambling establishments and all other businesses, while not conclusive evidence of the inequity of the tax, makes summary judgment improper. Pursuant to our standard of review of the trial courts’ summary judgment orders, I conclude appellants’ evidence of the grossly dissimilar tax rates creates a genuine issue of material fact as to whether the license tax is unjust and inequitable.

I would reverse and remand for trial.

Leave a Reply

Your email address will not be published. Required fields are marked *