PITTSBURGH- One of the nation’s most progressive gambling states is, like much of the country, struggling with one of its largest gaming entities.
Unregulated “skill” machines have sprung up across the country, including in states with legal sports betting and online gaming such as Pennsylvania. A 2022 report by the American Gaming Association, the nation’s top regulated gaming advocacy group, estimated there were nearly 600,000 such machines, a figure that has most likely increased in the ensuing years.
It’s estimated that unregulated terminals account for 40% of all gambling machines, legal or illegal, nationwide. These machines generated nearly $27 billion in annual revenue as of 2022, compared to $92 billion for the entire regulated industry, according to the AGA.
There are now 100,000 of these machines in Pennsylvania alone, said Jeff Morris, Penn Entertainment Vice President of Public Affairs, despite having a dozen legal casinos and being one of the few regulated iCasino markets.
Pennsylvania, one of the nation's most progressive gaming markets that features a dozen casinos plus statewide mobile iGaming, still has more than 100,000 illegal gambling machines, per Wyomissing, PA-based Penn Entertainment's Jeff Morris during today's NCLGS conference
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Speaking at the National Council of Legislators from Gaming States (NCLGS) gaming industry conference Thursday, Morris reaffirmed gaming stakeholders’ consensus these machines are a significant threat.
“What these illegal operators have done is they flood the market, they multiply like locusts, and then they try to force themselves into being regulated,” Morris said.
Advocates make their case
The gaming machines resemble and act like slot machines. Many have slight variations from traditional slot machines, such as requiring players to “solve” a puzzle, instead of aligning a reel. Depending on jurisdiction, operators can work around gambling laws by paying out “winners” with gift cards or other items of value.
These devices have spread across nearly every corner of the country. They’re frequently found at gas stations, truck stops, bars, and fraternal organizations, with many serving lower-income areas.
Defenders argue these machines are key revenue drivers for local businesses, especially in communities with few other options. They also argue the required skills and payout structures make these games legal.
The website for Pennsylvania Skill, a major skill machine company in the state, touts these devices as “legal, fun to play and create sustainable, supplemental income for local businesses.” The site’s home page includes an explainer outlining what constitutes a “legal and defendable game of skill” and a link to Pennsylvania court decisions reaffirming the company’s claim it is not a gambling entity and not subject to the same laws or regulations.
Opponents dig in
Opponents argue these machines flout local and state law while preying on unsuspecting customers who can’t differentiate these devices from legal options. The AGA and licensed gamblers stakeholders have made eliminating these machines a top legislative priority.
Other opponents point out these machines don’t have anti-money laundering controls, responsible gambling checks, underage gambling checks, or virtually any other form of regulatory accountability. They can also skew payout tables however they wish, creating virtually unwinnable playing experiences.
Regulated casino stakeholders, which see these machines as a threat to their financial bottom lines, note these machines pay far lower taxes and suffer none of the regulatory cost burdens. Multiple speakers during Thursday’s NCLGS conference said poor experiences at these unregulated gambling entities dissuade would-be customers from the regulated industry.
Among the other issues with unregulated gaming, a NCLGS panel of regulated gaming stakeholders said, is that unfair odds and bad gameplay experiences dissuade would-be customers from the regulated market; it also makes it harder for legal operators to stand out in the market
— Ryan Butler (@ButlerBets) July 18, 2024
Americans bet more than $100 billion annually with unregulated skill machines, according to AGA estimates. This comes at an annual cost of $8.7 billion in state taxes and $27 billion in legal gaming revenue.
“Keeping America’s gaming industry strong, safe and responsible can only be done through the robust infrastructure of the well-established legal market, not by rewarding bad actors with half-measures that fail to address the dangers of unregulated gambling,” said AGA president Bill Miller in a statement announcing the original 2022 study.
Pennsylvania underscores nationwide complexities
Pennsylvania is one of just a handful of states with regulated casinos, iCasinos, and a state lottery. It’s also struggling with handling skill machines.
Michigan, Kentucky, Virginia, Missouri, and Texas highlight a growing list of states that have wrestled with skill machine legislation or regulation in the past 12 months. Lawmakers have typically been divided between taxing and regulating these machines, keeping the status quo, or banning them outright.
"What’s clear is these machines will continue to proliferate in the absence of strict regulation," said Matt Hortenstine, General Council of Illinois-based video lottery terminal operator J&J Ventures during Thursday’s NCLGS conference.
Hortenstine, whose company operates regulated video gaming terminals that act like slot machines, said regulation is the only viable solution to the skill gaming question.
“I think in many states, that the only way we're ever really going to solve this problem is to create a regulated, distributed gaming market,” Hortenstine said. “The attempt to shut these down through a criminal prosecution methodology, just turns into a game of whack-a-mole.”
Casino operators in Pennsylvania and elsewhere, unsurprisingly, oppose legalization.
“So really, what we're looking at are two options:” said Penn’s Morris, whose company is based in Wyomissing, Pennsylvania. “Rely on the industry that has reliably generated millions of dollars here for the Commonwealth, work with companies that want to actually work within the law and not outside the law.”
“Or you can rely on an out-of-state company who's acted quite shakily for this, who came in uninvited, has no interest in playing by the rules, walked out of negotiations with us and leadership in the legislature, and remained secretive of their operations.”
Looking ahead
Taxing these machines should they be legalized has also been contentious. Pennsylvania’s 17 casinos pay a 50% tax rate on their slot winnings. Skill machine proprietors have pushed for a tax rate under 20% arguing their smaller-scale operations make a casino-rate unfair.
The Pennsylvania Supreme Court could give better clarity after it agreed in June to take up an appeal from the state’s attorney general’s office on a lower court ruling that declared these terminals games of skill. If the state Supreme Court upholds the lower court's ruling, it would give the machines legal protection – subject to future changes by the legislature.
This legal and legislative battle has been fought for years across dozens of courtrooms and statehouses. A firm decision in a major gambling state such as Pennsylvania on behalf of either direction could shape the future of these machines in many more states.
In the meantime, the fate of skill gaming machines remains at the forefront of much of the regulated gambling industry’s mind, Morris reaffirmed during Thursday’s conference.
“This is a major problem today,” Morris said.
