Pennsylvania Legislation Imminent To Regulate Grey-Market Machines

April 13, 2023
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As six casino operators remain in limbo while the Pennsylvania Supreme Court decides to grant their request for review of a 2019 ruling in favor of a skill-games manufacturer, one state senator circulated a memo saying it is time to legalize these terminals to generate tax revenue.

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As six casino operators remain in limbo while the Pennsylvania Supreme Court decides to grant their request for review of a 2019 ruling in favor of a skill-games manufacturer, one state senator circulated a memo saying it is time to legalize these terminals to generate tax revenue.

Republican state Senator Gene Yaw said he will introduce his bill by the end of the month that will protect consumers by getting rid of illegal gambling while providing the state with tax revenue and giving small businesses access to another revenue stream.

“Skill games are a piece of the small business economy in our state, and it’s time we recognize the benefits of this emerging industry and offer regulatory support, so that we can ensure it flourishes safely and responsibly,” Yaw said in a memo circulated among his Senate colleagues.

Yaw’s proposal would require the skill-based games, also known as grey-market machines, be connected to a terminal collection and control system that allows the state to monitor all transactions and ensure that all taxes are paid.

As of Thursday (April 13), it was unknown whether the Pennsylvania Gaming Control Board (PGCB) or Pennsylvania Lottery would be the preferred regulator.

Yaw said his bill would strengthen penalties for those that operate unlicensed and illegal gambling devices.

“These illegal gambling devices' negative impacts include but are not limited to the non-payment of local, state, or federal taxes, criminal activity, nuisance, and an increased strain on local and state law enforcement resources,” he said.

Chris Cylke, senior vice president of government relations with the American Gaming Association (AGA), urged states not to compromise and reward these businesses by legalizing “skill” machines.

“It’s brazen to ask for forgiveness after years of taking advantage of local communities and we are confident lawmakers in Pennsylvania will see through this ruse,” Cylke told VIXIO GamblingCompliance via email Thursday.

“Companies that peddle unregulated gambling devices are hellbent on convincing policymakers, law enforcement and the public that their products benefit small businesses and are too entrenched in local communities to be removed.”

“Even though some politicians are happy to take money from these bad actors and advance their tired narrative,” Cylke said, the truth is “unregulated operators pad their own pockets while hurting consumers and undermine the integrity of the highly regulated environment in which the legal gaming industry operates.”

Bills to legalize so-called skill games are not new in Pennsylvania.

Yaw introduced Senate Bill 950 early in the 2021-2022 session but was never discussed or voted on by the Senate Community, Economic and Recreational Development Committee.

The bill would have taxed the machines at 16 percent, while net revenues would be split with 40 percent going to the establishment, 40 percent to the operators, and 20 percent to the distributor. Yaw also proposed to limit stores and bars to five machines, while up to ten machines would be allowed in clubs.

Estimates put the number of grey-market machines as high as 80,0000 currently operating in Pennsylvania. Yaw estimated a legal skill-games market could generate $300m in immediate annual tax revenue.

Yaw has been an advocate for legalizing the machines, noting his district is home to Miele Manufacturing, a manufacturer of skill games. Pace-O-Matic (POM), a Georgia-based company, also distributes its machines in Pennsylvania.

“This industry has created hundreds of manufacturing jobs in and around my district,” Yaw said. “Nearly all the components are sourced in the United States, many in our commonwealth.”

Yaw also declined to return the $11,000 in campaign contributions he received from the industry since 2019, when media reports surfaced in June 2021 that lawmakers had received thousands of dollars in donations.

Supporters argue the machines are legal because they do not fall under the state’s Gaming Act.

The Pennsylvania Lottery, casino industry and some lawmakers believe the games are illegal and are costing the state and regulated gaming industry millions of dollars each year.

Yaw dismissed critics who argue skill games take money away from the state’s lottery and casinos, saying on Twitter Monday (April 10) that the “facts simply don’t support his assertion.”

The PGCB reported an all-time high of $5.21bn in gross revenue for 2022, while the Pennsylvania Lottery reported net revenue of $1.19bn on total sales of $5.008bn for fiscal year 2021-2022.

Ongoing Grey-Market Lawsuit

On March 20, Joel Frank, chairman and managing partner with Lamb McErlane in West Chester, filed a notice of appeal with the state's Supreme Court on behalf of six brick-and-mortar casinos.

The eight-page filing asks the six justices on the state’s highest court to reconsider a 2019 ruling by Commonwealth Court Judge Patricia McCullough that found certain skill games distributed by POM are not included in the Gaming Act and cannot be seized by law enforcement.

POM won similar court proceedings in 2014 and 2022. In all three instances, state agencies, such as the Department of Revenue (DOR) or the Bureau of Liquor Control Enforcement (BLCE), had to return the machines in question along with any cash they seized.

The DOR and BLCE, along with the six casinos, are defendants in this case. POM has maintained its machines are legal and the businesses it partners with are dependent on the revenue the games generate.

Among the questions presented for review by Frank are whether McCullough erred in failing to find that POM’s game is a “slot machine” under state law, and whether she erred in holding that the Gaming Act does not regulate unlicensed slot machines “because they fall outside the ambit of licensed facilities delineated” by the law.

The Pennsylvania Supreme Court has not announced whether it will consider the matter.

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