Legal VGT Operators Tell Senators About Their Troubles Competing With Black Market

Vendors, hosts of truck stop VGTs say conforming with regulations puts them at disadvantage
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Representatives of Pennsylvania’s legal VGT industry pleaded with a Senate committee Wednesday morning for some type of legislative action to address an “untenable” situation in which they must compete with unregulated, untaxed gaming devices.

The Senate Community, Economic, and Recreational Development Committee held the third in a series of public hearings to hear from various stakeholders in Pennsylvania’s gaming industry about the black market — or “gray” market, depending on one’s perspective — involving tens of thousands of unsanctioned gambling machines that have popped up in clubs, taverns, convenience stores, and other outlets.

Lawmakers have lacked consensus on whether to explicitly ban or to legalize/tax the devices, many of which are marketed as “skill games” that are also the subject of a pending Commonwealth Court case concerning their legality.

The legislators heard Wednesday from those involved in truck stop VGT operations — authorized by 2017 gaming expansion and up and running since August 2019 — that their unlevel playing field with the skill games market must be addressed, one way or another.

“Our competitors in the so-called skill games industry operate without impunity” in such areas as taxation, consumer protection, and responsible gambling safeguards, said Rob Miller, founder of Commonwealth Gaming, which markets legal VGT machines. “To say the least, this is an untenable situation.”

Christopher Reed, general counsel for Rutter’s, a convenience store chain with 17 truck stop VGT locations in the state, said legal operators are subject to extensive regulations that hamper the industry’s growth, unlike what occurs with skill games.

“The employee licensing is one area where the legislature can take a step,” Reed said, by acknowledging some of the practical difficulties an operator like Rutter’s has in meeting state requirements for participation in the VGT industry.

‘Nice guys finish last’ in this business

Pennsylvania allows truck stops meeting various criteria – diesel fuel volume, truck parking spaces, convenience stores on site, etc. – to apply for Pennsylvania Gaming Control Board licenses that enable them to host five VGTs similar to casino slot machines in designated spaces kept under camera surveillance and off-limits to minors.

By the end of 2020, there were 40 licensed facilities that generated $16.6 million in revenue from the machines, with 52% of that siphoned to the state as taxes. New locations continue to be approved by the gaming board, with its monthly report for May showing 46 in operation.

Miller said there would be many more by now, if not for the opportunity many locations have to make more money, with less burdensome provisions, by dealing with vendors of skill games or other gambling machines outside the gaming board’s purview. Truck stop operators receive 15% of the machines’ revenue, far less than what they may receive from an unlicensed vendor. Some operators, he said, have withdrawn from offering state-sanctioned VGTs to switch to the skill games instead.

“It’s truly a case of the nice guys finish last,” he said, in terms of those who try to conform with proper practices being at a disadvantage.

He said Commonwealth Gaming is also a supplier of VGTs in Illinois, Louisiana, and elsewhere, and those states have neither the same level of regulatory burdens as Pennsylvania nor a similarly extensive and thriving underground industry.

“In Illinois, the statute made a clear distinction that it would be a felony to possess anything that is not a regulated device,” Miller told the committee.

“We feel under siege,” he said when a senator asked if he felt the state was doing an adequate job addressing the black market. “We compete against someone that has no rules, no requirements, or anything else in the most highly regulated VGT market in the country.”

A gaming board official also explained to the committee the careful steps its laboratory takes to assure legal machines in the state provide fair play for consumers, including an 85% minimum return, to which unregulated devices are not subject.

The path forward remains murky

The Senate committee heard last week from the Pennsylvania Lottery that it estimates it lost $145 million in potential sales last year due to competition from the skill games, and that the loss would have been greater if not for COVID’s impact. Executive Drew Svitko said about 30% of the state’s 9,800 lottery retailers host the unsanctioned devices, which he said many patrons play in those locations under the mistaken belief that they are part of the lottery’s legal system of games.

Law enforcement officials, meanwhile, told the Senate panel that while occasional raids are conducted to confiscate machines, authorities are hampered by lack of clarity from the legislature over the devices, as well as their own limited resources to address illegal gambling.

“We anticipate continued market expansion of these unlawful gambling devices,” to the detriment of the commonwealth, without legislative action to address them, said Pennsylvania State Police Capt. Jeffrey Rineer, director of operations for the Bureau of Liquor Control Enforcement.

Sen. John Yudichak, chairman of the committee, repeated Wednesday that he has extensive concerns about damage stemming from unregulated machines and is hopeful that a bipartisan consensus can be reached on how to protect the state’s legal gaming industry while also assisting small business operators. He has not endorsed any specific approach, however, or given a timetable for moving on any legislation.

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