A rise in unlicensed gaming machines in Pennsylvania has led casino operators in the state to issue a petition to the Supreme Court, demanding a reassessment of the state’s taxation on slot machines, skill and hybrid games.
Filing the petition on 29 July, casinos such as Stadium Casino, Chester Downs, Rivers Philadelphia, Parx Casino Shippensburg, Wind Creek and Greenwood Gaming have requested âdeclaratory and injunctive reliefâ after considering the stateâs lack of taxation on unlicensed operators and machines as âunconstitutionalâ.
The petition has named the Pennsylvania Department of Revenue, along with its Secretary Patrick M Browne, and the Pennsylvania Gaming Control Board as respondents, demanding that taxes be âuniform, upon the same class of subjectsâ.
Casinos have issued the petition after considering the Pennsylvania Gaming Actâs âsubstantialâ ~50% tax on slot machine revenue as âunconstitutionalâ due to the lack of taxation on unlicensed gaming operators offering skill and hybrid games.
In 2023 alone, licensed operators contributed around $1.2bn in taxes through the ~50% slot machine revenue tax law, while unlicensed operators contributed 0% of their revenue from slots, skill or hybrid games.
The petition claims that since the Gaming Act was first introduced in 2004, over $20bn in revenue has been collected from slot machine taxes alone.
As a result of these findings, petitioners have claimed that the Gaming Actâs laws are being violated in numerous ways, stating that âthere are numerous unlicensed entities in the Commonwealth operating devices that annually earn billions of dollars in revenue which, if earned by a licensed casino, would be taxed as slot machine revenueâ.
Skill and hybrid slot machines
In 2017, amendments were made to Pennsylvaniaâs Gaming Act to change the definition of a slot machine to include skill and hybrid slot machines. Skill and hybrid slot machines implement at least a slight element of skill into a game of chance to be differentiated from a standard slot machine.
However, according to the petition, since the 2017 amendments to the Gaming Act, the operation of slot machines by unlicensed entities outside the framework of the Gaming Act has âexpanded significantlyâ.
The petition noted: âRecent estimates suggest that approximately 67,000 skill and hybrid slot machines are operating in the Commonwealth.â
It is believed that several unlicensed establishments, whether they be bars, taverns, convenience stores, gas stations, pizza shops, laundromats or other venues, are offering skill and hybrid slot machines without distributing any taxes from their machinesâ revenue, and without age-restriction and accessibility laws implemented through licences.
Referring to research from the American Gaming Association, the petition claimed that âthese machines generate an estimated $1.9bn in revenue for unlicensed operators annually â close to the $2.5bn that Pennsylvania casinos earned from slot machines in 2023â.
The petition also refers to the violation of the Uniformity Clause of the Pennsylvania Constitution, which states that taxes be âuniform, upon the same class of subjectsâ.
To affirm this belief, the petition set out to compare the similarities between slot machines and skill and hybrid machines that can be found in many unlicensed establishments.
The petition named Banilla Games and Pace-O-Matic as two unlicensed skill and hybrid machine developers, delving into their cabinets to explain that their games are basically just slot machines with added mini-games with slight skill-based gameplay.
One game, Pace-O-Maticâs Pirates title, had its gameplay showcased in a video included in the petition. The footage shows standard slot gameplay with players relying on chance for the vast majority of their wins.
While skill-based gameplay does become implemented into these titles, the petition states that this is usually in the form of âtime-consuming and difficultâ memory games in which players are often required to remember lengthy sequences that take between 12 and 15 minutes to complete, just to win back around 105% of their original stake.
The petition claimed that âall âskillâ and âhybridâ games function like thisâ, and again referred to research from the AGA that showed 65% of those familiar with skill and hybrid slot machines state that they âare no different from slot machines where wins are based on random chance, and that even a skilled player cannot reliably influence the outcomeâ.
Additionally, the petition noted that in 2023, Pennsylvaniaâs 1-800-GAMBLER hotline received 121 calls from individuals who identified âskill machinesâ as their âmost problematic gamblingâ or âthe gambling activity that the caller/subject has the most difficult time controllingâ.
The hotline also received another 68 calls from individuals who identified ânon Casino â slotsâ (defined as unregulated slots) as their âmost problematic gamblingâ.
Those 189 calls make up approximately 8% of all calls received by the hotline throughout 2023, which the petition refers to as âremarkableâ considering unlicensed operators that offer these machines arenât even required to advertise the responsible gambling hotline.
Furthermore, the rise of âparloursâ in Pennsylvania was noted by the petition, suggesting that at least two have opened up in the state. These parlours are essentially often unlicensed game rooms dedicated to operating skill or hybrid slot machines, without regulation as to who can access them or where they can be located.
One Pennsylvanian parlour, the Keystone Klub, was mentioned specifically in the petition as the facilityâs website advertises its âgame room to play skilled gamesâ, where customers âdonât have to sit at the back of a gas station or a loud smoke-filled bar or casinoâ. Instead, they can play in the âgame roomâ, complete with complimentary âbeverages and snacksâ and the âbest payoutsâ.
The Keystone Klubâs website advertises ârecent winnersâ of âjackpot[s]â and âgrand prize[s]â, showing thousands of dollars of winnings. The petition then included the following image to show the Klubâs offering, which looks similar to standard slot machines.
The petition explained: âTo date, the Commonwealth Court, as well as Courts of Common Pleas, have held that unlicensed entities are not prohibited from operating these skill and hybrid slot machines because the machines do not constitute âgambling devicesâ or âslot machinesâ under Section 5513 of the Crimes Code.
âIn addition, the Commonwealth Court has held that the unlicensed operation of skill and hybrid slot machines is not subject to the Gaming Actâs regulatory framework.
âAs a practical matter, these decisions effectively conclude that unlicensed operators of skill and hybrid slot machines are also not subject to the Gaming Actâs slot machine tax.â
Petitioners have underlined that they âvigorously disagreeâ with those decisions, leading to this very petition which asks for relief on four counts.
Declaratory and injunctive relief
Firstly, on Count I, the petition demands a declaration from the respondents that the taxation laws on slot machines are constitutional. Count II, meanwhile, seeks a corresponding permanent injunction requiring respondents to collect taxes from revenue generated from all slot machines in the state, including those operated by unlicensed entities.
Alternatively, the petitioners asked the Supreme Court to enjoin respondents from collecting slot machine taxes altogether.
The petition read: âTo avoid any immediate and disruptive effects on the Commonwealthâs tax revenue, Petitioners request that this Court stay such an injunction for 120 days to allow the General Assembly to correct the unconstitutionality of the slot machine taxes.
âTo be clear, Petitioners do not seek to pay no taxes on revenue generated from slot machines; rather, they seek parity in the burden of slot machine taxes, as required by the Uniformity Clause.â
Both Counts III and IV included similar aspects of Counts I and II, however, they referred to skill and hybrid machines rather than slot machines.