Pennsylvania Report Claims Illegal Machines Cost State $650m In Lost Lottery Sales

September 6, 2022
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The number of unregulated gaming machines in gas stations and convenience stores in Pennsylvania has grown dramatically over the past four years with no signs of a slowing trend, according to a new report commissioned by the state lottery.

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The number of unregulated gaming machines in gas stations and convenience stores in Pennsylvania has grown dramatically over the past four years with no signs of a slowing trend, according to a new report commissioned by the state lottery.

A report titled Pennsylvania Skill Machines and Lottery Revenue found the number of so-called skill games machines in the Commonwealth has grown from 707 when data was first collected in September 2017, to 11,634 such devices in March 2022.

In 2017, 53 of 67 counties had at least one machine at a retail location but by this year, all 67 counties had at least one machine. The report found that in 2017, not a single county in Pennsylvania had more than 100 machines.

“There are now 36, over half, of the counties with more than 100 machines. This has been an unprecedented and extensive influx of unregulated competition into the Pennsylvania Lottery retail network,” the report found.

In an email to VIXIO GamblingCompliance on Thursday (September 1), Pennsylvania Lottery spokeswoman Ewa Swope said the lottery commissioned the study from its primary vendor Scientific Games to show the “dire impacts these illegal games are having on the proceeds that help our seniors in Pennsylvania.”

So far, efforts to formally legalize and regulate the machines in the Pennsylvania legislature have stalled.

State Senator Gene Yaw introduced Senate Bill 950 in December that would have provided a regulatory framework for the skill-based games industry, including a 16 percent tax on all gross profits. Gaming device manufacturers Pennsylvania Skill, Miele Manufacturing and Pace-O-Matic have all expressed support for Yaw’s measure.

Yaw’s bill remains in the Senate Community, Economic and Recreational Development Committee, with no committee meetings scheduled as of Friday (September 2). The Senate is scheduled to reconvene on September 16 for three days.

The Senate will also convene for six days in October and for one session on November 15 before adjourning for the year, according to the legislative calendar.

As stated in the report, Swope said the appearance and expansion of games of skill machines across the state’s retail landscape has had a significant, negative impact on the revenue realized by the Pennsylvania Lottery.

“Skill machine penetration of the retail network has grown from less than 5 percent in 2017 to nearly 30 percent today,” she said.

In addition to this “wide” expansion, Swope said skill machines have expanded more deeply into the lottery's retailer network, increasing the average and maximum number of machines found in individual retailers.

Even though scratch-off sales have consistently grown during this timeframe, the report found that the total revenue realized by the Commonwealth, which was $14.9bn in scratch product between October 2017 and March 2022, was 4.4 percent lower than it could have been.

To put it another way, Swope said the machines have cost the Pennsylvania Lottery more than $650m in top-line revenue since tracking began in late 2017, resulting in a loss of more than $200m in revenue directed toward senior services and local government during that time.

“Finally, the presence of skill machines also reduces lottery recruitment success, further dampening sales, and significantly lowering returns to the Commonwealth,” Swope said.

Swope told VIXIO the lottery has not taken the step of cracking down on any of their retailers that have skill machines in their establishments.

“Instead, we have opted for an educational approach in which we have explained to retailers that the skill machines are considered illegal gaming devices by the Commonwealth,” Swope said. “Ultimately, enforcement of these illegal gaming devices falls to law enforcement authorities.”

“We feel strongly that legislators should take action to crack down on these illegal machines and preserve hundreds of millions of dollars that help seniors afford prescriptions, transportation, meals and more,” Swope added.

Supporters of the skill-based games take exception to the lottery describing the games as “illegal machines,” pointing to a 2014 Court of Common Pleas decision in Beaver County that deemed skill games legal, though the state has taken no steps to regulate the industry since.

Missouri Receives Skill-Based Complaints

While the Pennsylvania Lottery struggles to contain the spread of grey-market machines, in Missouri authorities have responded to almost 100 complaints since the beginning of the year of skill-based games operating in bars, gas stations and convenience stores.

The Missouri Gaming Commission (MGC) received those complaints after creating an online portal and phone line where people can submit complaints about the illegal gaming machines.

Elizabeth Hoffmann, an MGC spokeswoman, told VIXIO that after the complaints are received, they are forwarded to the Missouri State Highway Patrol’s Division of Drug and Crime Control, which investigates.

According to the online form, regulators require those who file a complaint to identify themselves and report the location of the business with the alleged machines. Regulators allow people to report a machine anonymously but ask them if they are willing to be contacted by an investigator.

The form also asks if participants are willing to sign a criminal complaint and/or testify in court.

Since January 1, 2022, when the online portal went live, the commission has received 93 reports of suspected illegal slot machines. Most of the complaints have been from customers saying they have not received a payout from the machines.

Hoffman said the gaming commission has even had some business owners call to inquire about how they can get machines for their businesses. In response, the commission says the so-called skill-based games are not regulated by the state.

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