On Monday, 29 July, 12 out of the 17 land-based casino operators in Pennsylvania filed a petition for review to the Supreme Court, requesting it to consider canceling the existing 48%-54% tax imposed on all slot machine revenues in the state. The casino owners gave the higher court two options: to rule the tax unconstitutional and relieve them of the obligation to fulfill them or level the playing field by bringing on board electronic skill games.

According to the operators, it was unfair that the tax only applied to approximately 19,000 licensed slot machines and failed to include over 67,000 unlicensed slot-like electronic games known as skill games. The said skill games are found at several locations across the state, including bars, pizza joints, restaurants, convenience stores, and others.

Skill Games Operating in Legal Limbo

The call for tax parity across the gambling industry, especially regarding skill games, comes amidst an ongoing debate about whether these unregulated games should continue to operate. Moreover, the unregulated skill machines are still marred by a couple of controversies raised by different stakeholders in the gambling sector.

Many court cases later, the decision on the legality and legitimacy of skill games may soon come to a close. This follows a recent lawsuit filed by the AG’s office against the skill game developer Pace-O-Matic, appealing to the Supreme Court to seize the machines. According to the suit, the seizure is based on the premise that the skill games have been defined as slot machines in a 2017 law.

Previously, lower courts have ruled that the Pennsylvania Gaming Control Board (PGCB) lacks the legal authority to regulate skill games that resemble casino slots. Therefore, they aren’t subject to regulatory oversight like traditional casino slots. This is because preceding cases have convinced the courts that skill games and slot machines are entirely different. Essentially, the former is based on a player’s ability to identify a winning payline, while the latter is a chance game since winning combinations are determined by the machine.

Accordingly, the games have been exempted from remitting tax revenues to the Department of Revenue. While the back and forth has dragged on for over a year, the court recently announced that it may soon settle on a definitive verdict. In their defense, skill game operators have often argued that the income generated from the electronic gaming terminals on their respective premises should not be taxed. How they see it, they are a form of supplemental income for small businesses that directly grow communities through employment opportunities and cushion families against inflation.

‘Treat Taxpayers in Similar Conduct the Same’

Since no levies are imposed on skill games, they have gained popularity across Pennsylvania. The petitioners observed that there is a constitutional guarantee under the Uniformity Clause in the Pennsylvania Race Horse Development and Gaming Act (the “Gaming Act”) that mandates fairness for taxpayers within similar classes.

In the consortium’s view, there was some preferential treatment for skill games, while casino slots were treated punitively. The petition explained in a footnote:

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“The Gaming Act contemplates two sub-categories of slot machines: (1) ‘skill’ slot machines, in which the skill of the player, rather than the element of chance, is the predominant factor in affecting the outcome of the game; and (2) ‘hybrid’ slot machines, in which “a combination of the skill of the player and elements of chance affect the outcome of the game… The tax treatment of skill and hybrid slot machines within a facility is the same, and it does not differ from that of other slot machines that operate within the facility”.

In the 38-page petition, the consortium indicated that there was no just reason to impose what it termed as disparate taxes on the operators while sparing the skill games operators. Mind you, skill game operators are also making profits from similar activities. The consortium of operators stated:

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“There is no basis for requiring licensed entities to pay about half of their slot machine revenue to the Commonwealth while allowing unlicensed entities to pay no tax on such revenue.”

The 12 casinos suing the state for unfair tax impositions are Hollywood Casino at The Meadows, Hollywood Casino at Penn National Race Course, Hollywood Casino York, Hollywood Casino Morgantown, Rivers Casino Philadelphia, Rivers Casino Pittsburgh, Live! Casino Pittsburgh, Live! Casino & Hotel Philadelphia, Parx Casino, Parx Casino Shippensburg, Harrah’s Philadelphia, and Wind Creek Bethlehem. The casinos are owned by the likes of Caesars Entertainment Inc. and Penn Entertainment Inc., which are some of the most dominant industry players. The initiative has also been backed by other casinos that were not included in the petition.

State Could Lose Over $1 Billion Annually

The outcome of this legal challenge could have substantial implications for the state’s gaming industry and its regulatory framework. For one, if the proposal to do away with the taxes altogether is upheld, the Keystone State would potentially lose out on the $1 billion annual revenue it has been collecting from the slot machines. Some proponents of having all gambling machines taxed indiscriminately include Gov. Josh Shapiro, who has been at the forefront of championing plans to regulate and tax skill games.

 The governor suggested a 42% tax on the games when he gave his 2024 budget address at the Capitol in Harrisburg in February, while other interested parties proposed a 16% tax. If taxed, skill games stand to generate over $150 million in the first year for the state. Meanwhile, the Department of Revenue and the Pennsylvania Gaming Control Board are yet to issue statements on the lawsuit. The board has revealed that it is in the process of evaluating it.