A multimillion dollar fight will determine whether Pa. taxes ‘skill games’ in bars and stores

On any given commercial corridor in Pennsylvania, there’s likely at least one “game of skill” machine.

The slot-machine look-alikes, which have proliferated across the state in bars and gas stations over the last few years by the tens of thousands, are unregulated and untaxed. Gov. Josh Shapiro wants to change that this year.

The Democratic governor’s proposal, which he estimates would raise $150 million in revenue in the next fiscal year and increase each year that follows, sets up a multimillion dollar debate that will play out this spring in Harrisburg between the casino and truck-stop gaming industries who want to ban the machines, the deep-pocketed game developers who favor regulating them — but at a low tax rate — and lawmakers who are searching for additional state revenue streams.

Pennsylvania’s spending is projected to outpace spending by next fiscal year. Shapiro wants to tax skill games at 42% of each machine’s gross profits.

“It seems, to me, like a winning lottery ticket and refusing to cash in,” said Sen. Gene Yaw (R., Lycoming), who has led the efforts to regulate skill games over the last few years.

Meanwhile, the future of skill game machines could be in question. The Pennsylvania Supreme Court is deciding whether to take up a case that would ban them statewide, while local governments are taking their own action. In Philadelphia, City Council is considering banning the games from most businesses, except those with a casino or liquor license plus at least 30 seats.

There are an estimated 50,000 to 80,000 machines already running in businesses across the state, which business owners say generate much-needed income as they grapple with rising expenses. Those who want to ban the games say their unregulated expansion takes advantage of poor people and problem gamblers, according to the casino-backed group Pennsylvanians Against Gaming Expansion. Others say they attract people carrying cash and encourage robberies.

Pennsylvania has rapidly expanded its gambling options in the last five years, with the approval of online sports-betting and online gambling that has brought in more state revenue. At the same time, skill game machines and illegal slot machines have continued to flood the market — and remain untaxed.

Skill games have avoided the steep taxes that casinos pay by taking advantage of a legal gray area, arguing there is a skill component to their games that make them different from slot machines and other games of chance. Users can win, for example, by matching three in a row like Tic-Tac-Toe, or memorizing a pattern, and can play by inserting at least $1 per game.

Pennsylvania’s courts, so far, have agreed with that legal interpretation. But Attorney General Michelle Henry appealed a case to the state Supreme Court earlier this year, arguing the machines should be banned from the state unless the state’s current gambling laws are updated — as Shapiro is proposing.

Pace-O-Matic, a Georgia-based skill games developer, has spent more than $10 million on lobbying efforts and legal battles, a spokesperson said. The company wants the state to regulate their games, called “Pennsylvania Skill,” but with a tax rate much lower than the 54% tax on casinos and video-gaming terminals in truck stops. The company’s lobbyists are pushing for a rate closer to 16%, which Yaw proposed in his latest skill games regulation bill, in an effort to allow businesses to keep most of the earnings.

Mike Barley, a spokesperson for Pace-O-Matic, called Shapiro’s 42% tax proposal “way out of the ballpark” and said the state could generate hundreds of millions of dollars in revenue at a much lower tax rate.

For the volunteer East Greenville Fire Company in Montgomery County, the five skill game machines in their social club help cover insurance and electric bills, said Joe Adam, a retired firefighter and president of the organization.

The machines might be counterproductive for the fire company if the state starts taxing their earnings at high rates, he said.

“We definitely would like to keep the money in the club if we could,” Adam added. “Whatever happens, happens, but it would be good to stay right here.”

Chuck Moran, the executive director of the Pennsylvania Tavern Association representing family-owned restaurants and bars across the state, said a majority of his members have the machines, and he fields question every day about the legal issues and lack of regulation.

“It’s always the same questions,” said Moran, whose organization supports regulating the machines. “We can’t really tell them if they’re legal or illegal, because it’s been playing out in the courts.”

In addition to Yaw’s proposal, Rep. George Dunbar (R., Westmoreland) introduced bipartisan legislation Tuesday to regulate skill games the same way the state regulates video-gaming terminals — slot machines in a limited number of truck stops around the state — and limit the total number statewide to 50,000 and five per establishment.

Any proposal would need to pass the House, where Democrats hold a narrow majority and the Republican-controlled Senate. Lawmakers aren’t split on the issue along party lines — but rather their own personal philosophies toward gaming expansion — and they’ll need to reach an agreement to get a bill to Shapiro’s desk.

Yaw said he hopes his bill this time around will weed out illegal slot machines and some skill machines that don’t meet his proposal’s regulatory standards.

Yaw, who represents the district where Pace-O-Matic manufactures its machines at Miele Manufacturing in Williamsport, claimed that skill games are incorrectly mistaken as slot machines because of their appearance.

“The unfortunate part is the cabinetry looks the same, but they’re really different,” Yaw added.