Legalize Or Not: U.S. States Grapple With Grey-Market Games

September 17, 2021
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The one issue a panel of gaming attorneys and industry analysts agreed upon on Thursday during a discussion on distributed gaming was the urgent need for state lawmakers to do more to address the issue of unregulated gaming machines.

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The one issue a panel of gaming attorneys and industry analysts agreed on Thursday during a discussion on distributed gaming was the urgent need for state lawmakers to do more to address the issue of unregulated gaming machines.

Adrian King, a partner with Ballard Spahr law firm in Philadelphia, said there are between 20,000 and 40,000 grey-market, or supposedly skill-based, gaming machine games in Pennsylvania at a time when gaming companies continue to invest millions of dollars into brick-and-mortar casino facilities.

“The grey-market is robust,” King said. “This is the calm before the storm. There are not a lot of legislative days left this year. Spring in Pennsylvania will be interesting.”

King, an attorney who represents the state’s gaming industry, said the tide seems to be turning and there is a good chance the legislature will outlaw these games next year.

He noted that there are 200 to 250 video gaming terminals (VGTs) lawfully operating at truck stops across the state. VGTs were authorized through the state’s 2017 gambling expansion act, with truck stops selling 50,000 gallons of fuel per month limited to five VGTs each.

Along with VGTs, Pennsylvania legalized retail and mobile sports betting, fantasy sports, internet casino gaming and mini-casinos limited to 750 slot machines and 30 table games.

King noted there are 15 casinos and soon to be 18 in Pennsylvania, and “operators are apoplectic to say the least” over any effort to legalize and tax grey-market skill gaming devices, as both the District of Columbia and Wyoming have done.

“You committed all-in to casino gaming,” King said of Pennsylvania while speaking to attendees of the International Masters of Gaming Law (IMGL) 2021 Autumn Conference in Boston. “It is quite unfair for us to make these investments that aren't even complete.”

King was joined for the hour-long discussion on the perils and benefits of distributed gaming by Jessica Feil, vice president government relations with the American Gaming Association (AGA), Paul Jenson, an attorney with Taft Stettinius & Hollister, and Joseph Weinert, executive vice president of Spectrum Gaming.

First established in Nevada more than 60 years ago, distributed gaming refers to placing slot machines, VGTs or similar video lottery terminal (VLT) devices into bars, restaurants, grocery and convenience stores, or other similar retail locations. In addition to Nevada and Pennsylvania, distributed gaming is legal in Illinois, Montana, South Dakota, Oregon, West Virginia and Louisiana.

Weinert said the primary purpose behind states legalizing distributed gaming is “fiscal receipts.” Other reasons to legalize VGTs include helping grow a state lottery, helping small businesses, and eliminating the illegal or grey-market machines.

Weinert said the understated reason behind states considering distributed gaming is that it is “easier and faster than legalizing an expanded number of casinos.”

Another overlooked story is Georgia, where the Georgia Lottery Corporation became the regulator of coin-operated amusement machines offering games based on skill in 2013 as lawmakers and the lottery successfully eliminated grey-market machines.

Weinert said the moral of that story is if “you can’t beat them, regulate them.”

Pennsylvania is far from the only state grappling with a proliferation of unregulated gaming machines, which remain a major point of frustration for the regulated gambling industry.

Lawmakers in Missouri next year will consider legalizing VGTs in bars and restaurants to reduce the number of unregulated devices throughout the state.

Republican state Senator Denny Hoskins told VIXIO GamblingCompliance last month that his bill would cap the number of VGTs at 10,000, which is about half of the estimated 20,000 grey-market machines in the state.

North Carolina lawmakers are also debating whether to move forward with legislation to legalize an estimated 94,000 illegal terminals which have appeared in bars and taverns over the past decade. House Bill 954 would allow businesses with liquor licenses to have up to ten VLTs.

If HB 954 becomes law, the VLTs would generate revenue for the North Carolina Lottery. Weinert estimated North Carolina would generate $2.5bn in gross gaming revenue from VLTs in year five of them being legal.

In Virginia, skill gaming machines officially became illegal on July 1, 2021, after being allowed to operate legally for a year amid the coronavirus pandemic.

But there is a push to bring them back to convenience stores and bars.

A bill proposed earlier this year by state Senator John Bell, a Democrat, called for 10,000 legal VGTs state-wide, with a 34 percent tax rate and revenue split between the Virginia Lottery, local municipalities and the state’s general fund.

Weinert questioned the timing of Bell’s proposal with four casinos expected to open over the next couple of years, and voters in Richmond deciding in November whether to approve Urban One’s $560m casino proposal.

“This is coming at a time when they are developing a casino industry,” he added.

Feil said every state is different and will address the issue of grey-market games differently.

She noted that the games have been “popping up around the county,” so the gaming industry must figure out how to drive them out of communities.

Feil said the AGA and gaming companies have reached out to law enforcement for assistance, but they have a lot of other things on their plate to deal with.

She said the issue of grey-market games is about consumer confidence and how consumers view the gaming product.

“We want to see a highly regulated industry,” Feil said. “That’s the only way we are going to see the continued growth of tax revenue.”

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