State crackdown on Internet cafes would limit payouts

The games are played with sweepstakes points awarded with the purchase of some product, usually Internet time or phone minutes. At the Cyber Cafe Dayton where a reporter visited on Monday, one dollar equals 100 sweepstakes points, or one to three spins on a computer game that looks just like video slots.

Internet sweepstakes cafes exist through a loophole in state law that the Ohio Attorney General and lawmakers intend to close. The General Assembly imposed a moratorium on new cafes and machines last year while revising state gambling law, buying time to study the problem and find a solution.

The moratorium expires June 30, 2013, but lawmakers could decide this week whether to impose restrictions that would all but extinguish the industry in Ohio.

States have had little luck controlling the booming sweepstakes cafe industry. Florida lawmakers tried and failed to pass bills shuttering the industry there, leaving regulation to local city and county ordinances.

For the past year, Ohio legislators worked with cafe owners to craft regulations regulating the industry under the Ohio Casino Control Commission. That plan was shelved two weeks ago after veterans’ groups complained of the cafes’ intrusion on charity gaming.

Instead, the Ohio House of Representatives endorsed House Bill 605 last week in a bipartisan 63-30 vote. Legislators in the Ohio Senate are weighing their options: Push through a relatively new bill in the last week of this legislative session or wait until next year to start from scratch. Senators on the Government Oversight and Reform Committee plan to review the bill today and the full Senate could vote as early as Wednesday.

Bill would limit prizes

HB 605 would not outlaw sweepstakes cafes, but it would break their business model — and maybe the business itself.

Under the bill, sweepstakes cafes would have to register with the Attorney General’s office and could not award prizes worth more than $10.

Jerry Zeng, operator of the Lucky Internet Cafe, 3010 Harshman Road in Riverside, said the payout restriction is unfair to cafe owners who are already operating.

“Ten dollars, seriously?” Zeng said. “Nobody will come.”

Zeng said he would favor more regulations, over the proposed bill. He said he invested about $90,000 for computers, comfortable chairs and to renovate his storefront space with 45 terminals. The cafe opened in mid-September. Business is slow during the day but picks up during the evening and on weekends, Zeng said.

At the Lucky Internet Cafe, patrons use prepaid cards to play sweepstakes games. The cards also can be used to study history, learn a foreign language or to improve typing and math skills, using the cafe’s terminals with 25-inch monitors.

“Most customers come here for the sweepstakes,” Zeng acknowledged. “It’s a game. People come in here to play and relax.”

Zeng said the biggest sweepstakes win at the Lucky has been $748, but there is potential to win $1,000.

Free of regulations, cafes do not have to report their revenues or guarantee a set payout, but national experts estimate each gaming machine can generate between $1,000 and $5,000 a month.

Rules more rigid for casinos

The sweepstakes cafes are part of a greatly expanded gaming landscape in Ohio.

Ohio voters legalized gambling in 2009 through an amendment to the state constitution authorizing four casinos. But the regulated casino industry bears little resemblance to the unregulated sweepstakes cafe industry.

The casinos have to pay $50 million up front and pay 33 percent to the state in taxes to benefit host cities and counties and help for gambling and addiction. Casinos in Cleveland, Toledo and Columbus together have grossed $293.9 million since May, after paying out between 80 and 90 percent, according to the Ohio Casino Control Commission.

Cafe owners say they pay taxes in the form of sales taxes, which ranges from 5.75 to 7.75 percent depending on the county.

The cafes have come under fire from veterans and fraternal groups, who say they siphon money away from their games, which generate money for charity.

Bill Seagraves, executive director of VFW of Ohio Charities and president of the Ohio Veterans and Fraternal Charitable Coalition, said annual revenues dropped from $6 million to $3.8 million in recent years.

Until the moratorium, sweepstakes cafes were rapidly multiplying throughout Ohio. More than 800 establishments registered with the Ohio Attorney General’s office, including nearly 100 in the Miami Valley.

Attorney General Mike DeWine, who backs HB 605, estimates that hundreds of millions of dollars are being spent at sweepstakes cafes each year in Ohio.

DeWine said cafes sell products rarely used by customers, and he suspects that sales taxes are not properly remitted in all cases.

But Rep. Jim Butler, R-Oakwood, voted against HB 605 last week, saying it goes too far. He wants to establish regulations that ensure the cafes operate legitimately, in which customers go there to purchase a product that can be used elsewhere, such as phone minutes. He said selling Internet time should not be allowed because that is available for free at local libraries.

“It’s just a longer way of figuring out whether you win or not,” Butler said.

The bill’s sponsor Rep. Matt Huffman, R-Lima, said the longer sweepstakes cafes go without regulation, the more socially accepted they will become.

“It’s a terrible problem brought on by folks who took a leap based on lawyers who said it’s not illegal, and our — the General Assembly’s — inability to do something two years ago,” Huffman said.

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