Internet cafes in Ohio could be forced to close soon

Internet sweepstakes cafe owners and supporters only have a few days left to collect enough signatures to stall a new Ohio law to shut them down.

But lawmakers have pledged to get rid of the cafes and have a back-up bill in place they say will close the businesses, which sell phone cards or other products that enable customers to play slots-like games on computer terminals.

Sweepstakes cafes were the latest enterprise to pop up in Ohio’s young gambling scene, and lawmakers and experts say it won’t be the last. The plight of Internet cafes exposed loopholes in state law and some lawmakers say it’s time for a comprehensive review.

Gambling is illegal in Ohio, per the state Constitution, except for a handful of games: State-run lottery, charitable gaming, four land-based casinos and horse racing. The exceptions have generated billions each year in revenues, some of which goes to schools, local governments and law enforcement and charities.

Lawmakers, urged on by law enforcement and the state attorney general, decided Internet sweepstakes cafes don’t belong among Ohio’s games. Earlier this year, they enacted House Bill 7 to limit prize payouts to less than $10 and authorize the attorney general and Bureau of Criminal Investigation to raid cafes suspected of breaking the law.

“It will put a lot of people out of work,” said Rick Taylor, who manages Spin N Win Internet cafes at 2178 N. Gettysburg and 3958 Linden Avenue in Dayton and two in Columbus.

Taylor and 20 employees and patrons spent eight hours on Wednesday walking petitions door-to-door in the greater Dayton area gathering signatures to get a referendum on HB 7 on the November 2014 ballot.

Patchwork law

The constitutional exceptions for gambling allow four casinos in Cleveland, Columbus, Toledo and Cincinnati, a state-run lottery, horse racing and bingo for charitable causes.

Voters approved adding a lottery in 1973 and charity bingo in 1975. Voters turned down four proposals to legalize casinos — in 1990, 1996, 2006 and 2008 — before approving four land casinos in specific locations in 2009 with 53 percent of the vote.

Rep. Matt Huffman, R-Lima, who sponsored HB 7 and a similar bill last session, said the voters have spoken, and they have not endorsed Internet sweepstakes cafes. He said sweepstakes cafes don’t fit within those parameters and lawmakers are upholding the Ohio Constitution by eradicating them.

“We didn’t know where most of the money was going to for these cafes,” Huffman said.

Cafes do not report revenues but industry consultants estimate each terminal generates between $1,000 and $5,000.

Veterans and fraternal organizations purchased the software in order to compete with sweepstakes cafes. Internet cafe owners say they’re being treated unfairly because fraternal organizations own the same machines.

But the fraternals are required to contribute some money to charitable causes and report finances to the attorney general, Huffman says.

“The machines look the same,” Huffman said “The good thing is some of the money is going to charity. The bad thing is it’s not bingo.”

Some organizations have installed “electronic raffle” or “electronic bingo” machines that also resemble slot machines. Attorney General Mike DeWine said the machines are illegal but has held off enforcement so lawmakers can decide whether carve out an exception for veterans and fraternal organizations that use them.

But Huffman said the law is clear: “You can’t have for-profit gambling in Ohio except at four casinos according to the Constitution.”

Casinos vs. cafes

DeWine first targeted Internet cafes in 2011, before Ohio’s first casino opened, calling on lawmakers to regulate the businesses. A moratorium on new cafes was passed and cafe owners were asked to register with the state.

More than 800 registered, but many did not include the owner’s or business name or other information. By 2013, only 339 had registered. In the Miami Valley, nearly 100 cafes registered in 2011, now only 32 are listed.

DeWine supported HB 7 and shutting down the cafes, which he said attracted money laundering and other crimes. The bill required cafes to again register with the state during the summer. This time, only 339 signed up.

Casinos have been on the offensive, backing a campaign against the cafes and sweepstakes software companies petitioning for a referendum. The casino-backed group hired “educators” that follow petitioners and try to intercept potential petition signers.

Ohio’s first casino has been open for only 16 months and its last casino opened in March. Initial revenue and jobs numbers haven’t lived up to what casinos promised Ohioans during the November 2009 campaign, but gaming expert Alan Silver said casinos can’t blame Internet cafes for their woes. Silver, an assistant professor at Ohio University, said the economy and growth of gaming throughout the entire region is hurting Ohio casino revenues.

Silver doesn’t expect patrons to flood the casinos if Internet cafes close.

“It’s a different type of niche market where you probably have a lot of locals who like to go there,” said Silver. “They’re not into the glitz and glamor of the full blown casino. They just want to drive down the street or a couple miles to relax or unwind.”

Cafe owners and patrons say Internet cafes offer a more comfortable setting for people to play games. Cafes tend to set up shop in strip mall storefronts and offer free snacks and nonalcoholic beverages.

Silver said the larger problem with Internet cafes is that they’re not regulated. Casino slot machines are required, by law, to pay out at least 85 percent of what they take in. Internet cafes do not have to post payouts, their machines aren’t inspected and they don’t have to report how much patrons spend, win and lose.

“The whole factor in here is that without background checks, there’s no telling what the payouts are.” Silver said. “There’s no telling what you’re going to be getting. In essence, it’s a rip-off.”

Patrons of Dayton’s Spin N Win cafes disagreed.

“People who like to come here and play have their own little corner of the world,” said Brenda Moore, 52, of Dayton. “I’ve seen a lot of people lose. I also just saw a lady win $1,200.”

Moore said people go to the Internet cafe with $40 to $50 to spend, and they expect to win at least $30 back.

“Some people double their money. If they can only win $10, they won’t be coming back here,” Moore said.

What’s next?

Cafe owners, who lure customers with the promise of big jackpots, say the limits would force them to close their doors. Owners are fighting back, gathering signatures for a referendum on the bill.

The first batch of signatures fell 71,140 short, and the group has until Oct. 3 to submit more.

If enough signatures are deemed valid, House Bill 7 will be put to a vote on the November 2014 ballot. The law would be on hold and cafes could stay open through Election Day. Spending on both sides of the ballot issue could be huge — casinos spent $47 million in 2009 to convince voters to authorize the casinos.

But the effort might be for naught, as lawmakers move forward a second bill that attempts to close cafes by limiting the percent of gross receipts a business can make from sweepstakes promotions.

This bill, Senate Bill 141, includes an emergency clause so the law would go into effect immediately and not be subject to referendum.

Sen. Bill Coley, R-Liberty Twp., voted against HB 7 and SB 141. Coley said cafes could be shut down by enforcing existing sales tax law. Assuming a 90 percent payout, Coley said, cafes should be paying 73 percent of their revenues in sales tax.

“We need to keep an open mind for how to deal with this,” Coley said. He said it might be time to review how Ohio regulates the different games, maybe create one gaming commission to oversee all of them.

Sharon Echols, 53, of Dayton, said Internet cafes like Spin N Win provide entertainment for a lot of people, especially older people.

“I think there is enough out there for everybody, but the casinos want it all,” Echols said. “[Ohioans] voted on the casinos. Why don’t we vote on having Internet cafes here.”

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