Regulator Warns Of Unregulated Machine Impact On Pennsylvania Gaming Industry

March 8, 2024
The executive director of the Pennsylvania Gaming Control Board believes the proliferation of skill-game machines within the state has negatively impacted the state’s land-based casino industry.

The executive director of the Pennsylvania Gaming Control Board (PGCB) believes the proliferation of skill-game machines within the state has negatively impacted the state’s land-based casino industry.

“Originally, it may have been four or five machines [in a location] but now I believe they are installed in greater numbers,” PGCB executive director Kevin O’Toole said. “The number of these machines, I believe, exceeds the number of (slot) machines we have at 17 land-based casinos.”

Those 17 casinos in operation are taxed and regulated by the PGCB, with between 48 percent and 54 percent of their gross revenue from slot machines paid to the state. 

O’Toole gave an update on litigation and legislation to regulate and tax the estimated 80,000 terminals during a regulator fireside chat panel at the Gaming Law, Compliance and Integrity Bootcamp hosted by Seton Hall Law School in Newark, New Jersey.

The number of slot machines in operation at Pennsylvania casinos in January 2024 was 24,949 compared to 25,799 at the casinos in January 2023, according to PGCB data.

“There has been a lot of litigation, because every time an agency would seize these machines and file a complaint indicating they were illegal that would create litigation,” he said. “The owners want to get their machines back.”

O’Toole said there had been several cases, including some where judges did not rule in favor of Pace-O-Matic (POM) and other skill-game manufacturers.

On Monday (March 4), he focused his comments on the Dauphin County case, which is currently before the state's highest court.

The case stems from agents with the Pennsylvania State Police and Bureau of Liquor Control Enforcement (BLCE) in 2019 seizing three POM machines, cash totaling $525 and seven receipts from Champions Sports Bar in Dauphin County.

According to the BLCE, the POM machines were gambling devices, and the $525 and receipts were derivative contraband.

After multiple verdicts and appeals in the case, the Commonwealth Court in Harrisburg ruled en banc on November 30 that unregulated “Pennsylvania Skill” machines manufactured by POM and distributed by Capitol Vending Company were a game of predominant skill, not a game of chance.

Therefore, wrote Commonwealth Court Judge Lori Dumas, the “games are not illegal per se.”

O’Toole explained that the judge’s ruling meant the POM machines are not considered to be unlawful under the Pennsylvania Criminal Code and the state’s Gaming Act.

Attorney General Michelle Henry has since filed a “discretionary appeal” with the Pennsylvania Supreme Court seeking a review of the Commonwealth Court’s opinion.

“We don’t know what they are going to say,” O’Toole said. “It’s kind of in a holding pattern.”

O’Toole also noted that various bills have been introduced by the state General Assembly to regulate and tax the terminals or to prohibit the machines in the state. Should any one of those bills pass, he said, that new law would supersede whatever the state Supreme Court decides.

O’Toole said he was familiar with House Bill 2075, which was introduced late last month, to regulate and tax skill games but hadn’t read it in its entirety. The bill seeks to impose a 16 percent state tax on gross profits and put skill-game machines under the Department of Revenue’s oversight, rather than the PGCB.

Representative Danilo Burgos, a Democrat who sponsored the bill, estimates the tax on skill-games would generate about $300m annually. The measure would mandate how operators, distributors and host businesses share their revenues.

Burgos suggests of the 84 percent of the gross gaming win, the establishment and operator each receive 40 percent and the distributor receives 20 percent.

Along with tax revenue, the state would receive an initial $1m application fee from each approved distributor, $25,000 from each approved operator, and $250 per host business. Those licenses would need to be renewed annually for $100,000, $5,000 and $250, respectively. 

Bars, convenience stores, or other approved retail locations would be allowed a maximum of five machines. Each wager would be capped at $5 a play, with maximum payouts per game capped at $5,000.

HB 2075 has been referred to the House Gaming Oversight Committee, but as of Thursday (March 7), no hearing date has been scheduled.

O’Toole reminded attendees that as part of his proposed budget, Democratic Governor Josh Shapiro wants to tax skill games and supports having the PGCB being the regulator if legislation is passed.

Shapiro proposed a 42 percent tax on daily gross revenue from the machines as part of his annual budget proposal, projecting $150.4m in tax revenue in the next fiscal year.

Pace-O-Matic executives have told Pennsylvania lawmakers they support regulation, but do not want to be overseen by the control board and believe the industry cannot sustain a tax rate at or near the level of casinos' slot machines or video gaming terminals at truck stops.

“We are still up in the air on unregulated machines,” O’Toole said. “Every jurisdiction is trying to handle it the best way it can, but it has been somewhat of an unsettled issue.”

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