The Skill Battle

In Missouri, they’re called “No-Chance Games.” In North Carolina, they’re “Fish Games.” In Virginia, they’re “Queen of Virginia.” In Pennsylvania and Wyoming, they’re “Pennsylvania Skill” and “Cowboy Skill,” respectively.

They look and behave like casino slot machines, but their producers and operators claim they are legal because of a purported element of skill that contributes to winning. The skill factor varies by manufacturer—one style gives the player an opportunity to touch a reel spot to turn it wild within a short time period; another displays a result and allows the player to decide whether or not to place a wager after recognizing winning combinations.

Other than that, the games operate like casino slots, accepting wagers, spinning reels and paying out in cash.

Shortly after the pandemic crisis hit in 2020, skill games began proliferating rapidly, placed in convenience stores, taverns, charitable clubs, gas stations and even locations as diverse as laundromats and pizza parlors.

In all states where they have appeared, the games are vehemently opposed by the regulated gaming industry as unlicensed, unregulated and untaxed slot machines.

“In some ways we’re victims of our own success,” comments Chris Cylke, senior vice president of government relations for the American Gaming Association. “Gaming has never been more popular or more accepted as a form of mainstream entertainment, and that’s great for the industry, but it also has created a lot of interest in, let’s say, adjacent businesses that want to provide a gaming-like product and avoid the regulatory requirements and regulatory scrutiny that come along with that. Skill games are among those.”

There have been numerous challenges to the legality of these games, with law enforcement seizing machines and with lawmakers in multiple states seeking to ban them outright. So far, though, the manufacturers of the skill games, led by Georgia-based Pace-O-Matic (POM) and Missouri’s Torch Electronics, have convinced judges in a few seizure cases that the games are technically legal.

An appeal of one of those decisions, involving seizure of Pace-O-Matic machines, awaits a hearing before the Pennsylvania Supreme Court.

The AGA has aligned with the Association of Gaming Equipment Manufacturers (AGEM) for the past four years in a campaign to have the machines banned. Meanwhile, state legislatures have considered bills to have them either explicitly banned or legalized, taxed and regulated.

Virginia enacted a law in 2020 banning the skill games. Wyoming passed a law in 2023 legalizing and regulating the games, restricting them to truck stops and age-restricted locations, charging annual license fees, and taxing revenues at 20 percent.

Supporters of the games claim their earnings have been vital—particularly since the pandemic hit—to the survival of small businesses, nonprofit fraternal organizations such as the American Legion, and charitable social clubs. In fact, Virginia Governor Glenn Youngkin agreed to delay enforcement of that state’s ban on the games for a year to allow small businesses to get through the Covid-19 crisis.

Operators continued to offer the games while a lawsuit filed by small business owners wound through the courts, but the plug was pulled for good when the Virginia Supreme Court rejected the lawsuit. This year, Pace-O-Matic managed to find a loophole in the Virginia ban, altering its Queen of Virginia games so they don’t accept coins or tickets—as described in the law’s definition of skill games—but require the patron to pay cash to the operator of the machine to have it “unlocked” for play.

The machines are otherwise identical to the games banned by the state. Once the buy-in amount is lost, the player can make another deposit. Winnings can be collected in cash from the operator. A Hanover County District Court judge dismissed a misdemeanor charge against a convenience store owner charged with operating banned games on the basis of the alteration made to sidestep the legislative prohibition.

Meanwhile, in Missouri, a state House committee approved a measure that would force Torch Electronics and other skill-game suppliers to convert their games to regulated lottery games or shut them down. That bill now awaits a floor vote.

Keystone Battles

When it comes to the battle over skill games, many consider Pennsylvania to be ground zero. Recent estimates count the number of skill games across the state at more than 70,000, located in small businesses, taverns, gas stations, convenience stores and a variety of other locations, including dedicated “mini-casinos” and “skill-game parlors” in strip malls.

Pennsylvania is where Pace-O-Matic won its first court cases, with judges holding that because there was skill involved, the games did not fall under the purview of the Pennsylvania Gaming Control Board. The PGCB and AGA have filed amicus briefs in support of the state in its Supreme Court appeal of one of those cases.

Pennsylvania casino licensees have also joined the case, filing a brief as a group, according to Eric Hausler, president and CEO of Greenwood Gaming, parent of Parx, the state’s most profitable casino.

“The casinos as a group filed in the Supreme Court case, and in all related cases all the way through the Commonwealth Court,” Hausler says.

“Our fundamental belief initially was these are slot machines. They’re not substantively different from a casino slot machine, despite the fact that they have a skill element, so Parx and Greenwood have been at the forefront of the efforts (to rein them in). Our lobbyists and our legal counsel have all been sued by Pace-O-Matic at various times, despite our efforts to actually come up with some sort of compromise solution.”

Hausler says the lawsuits are meant “to hurt our ability to advocate for tax, regulation or an outright ban of these games.”

He adds that the skill games have definitely hurt casino slot revenues in the state. “If you look at Pennsylvania’s slot revenues, we compete with New York, Ohio, Maryland, West Virginia and New Jersey, which are all on our border,” he says.

“Since 2019, they’ve opened four Category 4 (mini-casinos, each with 750 slots) in Pennsylvania, plus Live! in downtown Philadelphia, which is over $1 billion of development, and the slot revenue growth rate in Pennsylvania has been virtually zero. It’s the lowest growth rate of any of the surrounding states.”

While Pennsylvania is one of seven states with legal iGaming, Hausler blames the state’s unusual level of retail competition for the flat results compared to its neighbors. “None of the surrounding states have skill games,” he notes.

He says the real victims of those revenue losses are the state’s citizens. “We can see in our business that it’s meaningfully impacting slot revenues, but more importantly, we pay a 54 percent slot tax, and 34 percent of that goes to the Property Tax Relief Fund. So, the people being harmed by untaxed and unregulated gaming are the taxpayers who are not getting 34 cents on the dollar for property tax relief. It’s really the taxpayers of Pennsylvania who are getting jammed here.”

Pace-O-Matic officials initially agreed to be interviewed for this article, but in the end, emailed GGB a statement that ignored many of the questions they were asked to address. As with most of the company’s public statements, Brian Carr, a senior consultant for the company, cited its victories in Commonwealth Court and county courts as evidence its skill games are legal.

“While Pace-O-Matic has long advocated for the regulation and taxation of skill games, attempts to apply the same regulatory and tax structure that exists for casino games to games of predominant skill are nefarious,” Carr said in the statement.

“Pennsylvania courts have affirmed the difference between games of chance and games of predominant skill many times. Unlike casino slot machines, Pennsylvania Skill games have no set payout ratio that decides how often a player will win. A player can win a Pennsylvania Skill game every time.”

Hausler says the court decisions came down to differences between the definition of a slot machine in Pennsylvania’s Gaming Act and in the criminal code.

“The reality is, it’s an anomaly,” he says. “I would say that the skill games folks have exploited the way the legislation was drafted. When you look at the games themselves in play out in the field, if it walks like a duck and talks like a duck, it’s a duck.”

He adds that Pennsylvania’s 2017 gaming expansion law modified the definition of slot machines in the Gaming Act to include skill-based slot machines. “Because they modified the Gaming Act, if I took a skill game—even one that has been deemed legal—and put it on the floor at Parx, it would cost me 54 cents on the dollar. If I put it in a location on adjacent real estate we own, I could put that same game out and not pay any taxes on it at all. That anomaly in itself needs to be solved.

“I think the Supreme Court will take a much broader position than the very nuanced detail the Commonwealth Court has taken; the Supreme Court will take a much broader look at it and say this in substance is not a casino game, but it is a slot machine.”

Legislative Solutions

As Pennsylvania stakeholders wait for the state’s high court to schedule hearings on the state appeal, lawmakers are pushing separate bills to legalize and regulate the skill games. Governor Josh Shapiro, in his January budget announcement, anticipated revenue from taxing skill games at 52 percent, close to the effective 54 percent tax on casino slot revenues.

Shapiro, who complained that the games have cost the Pennsylvania Lottery an estimated $200 million since 2020, also proposed a regulatory framework for the skill games that would limit their number. He proposed to regulate the skill games along the same lines as truck-stop VGTs.

There are now two primary bills in the Pennsylvania Senate to regulate and tax skill games. Senator Gene Yaw, who has championed the skill games for years and has introduced skill-game legislation in the past several sessions, introduced his latest bill, SB 626, in April. It would limit the number of skill games to five per retail location and 10 per social club, with the stipulation that revenue from the games could not be the operator’s primary source of income.

The Yaw bill would place regulation of skill games not with the PGCB but under the state Department of Revenue, which also oversees the Pennsylvania Lottery. Revenue would be taxed at 16 percent, with proceeds—Yaw estimates $300 million in annual tax revenue—going to the Clean Streams Fund, dedicated to reducing pollution from agriculture operations.

Certification of individual games would be required from an “independent testing laboratory, with experience in testing skill video game software and approved by the department.” There would be no minimum or maximum return-to-player percentage required.

Yaw has promoted his bill as a way to support small businesses and fraternal organizations, and has pointed to a fund through which Pace-O-Matic’s skill games funnel some of the profits to local community fire departments. The Georgia-based company’s political action committee has been a major contributor to Yaw’s political campaigns over the years.

In May, state Senator Chris Gebhard introduced an alternative to Yaw’s bill that more closely follows the outline of Shapiro’s January proposal. Gebhard’s bill has the support of Senate leaders—its co-sponsors include Senate President Pro Tempore Kim Ward and Senate Majority Leader Joe Pittman.

The Gebhard bill, SB 756, would place skill games under the exact same regulatory regime as truck-stop VGTs, except with a revenue tax rate of 35 percent as opposed to the 52 percent on VGTs. Like VGTs, the skill games would fall under the jurisdiction of the state gaming board. Their numbers would be limited to five machines per location, with a statewide maximum of 30,000, counting both skill games and VGTs.

Certification requirements for individual games would be identical to the requirements for slot machines and VGTs—they would be submitted to the PGCB’s dedicated testing lab or an independent lab for certification that would then be approved by the PGCB.

Requirements for manufacturer licensing would be the same as those for casino slot manufacturers.

Casino industry leaders say the Gebhard bill would create a level playing field between skill games and the VGTs already operating in the state’s truck stops. “I think it is a very thoughtful start to a tax and regulatory system that would work,” says Hausler.

“It provides a good, strong regulatory background, which these games need. There’s rampant crime, there’s rampant money laundering. There are many games in the field that are not skill games under any definition of the law—not Pennsylvania Skill, but Philadelphia Skill or some other name. They are slot machines, but if there is a skill element, it’s barely available. I think SB 756 addresses that. It’s a reasonable balance between taxation and regulation.”

Many maintain that skill games should be taxed at the same, higher percentage as casino slots. “Ideally, we’d be asking for these manufacturers and these machines to exit the market,” says the AGA’s Cylke. “We understand and appreciate the position that the legislature is in, and the fact that there are a lot of different views on how to how to solve this, whether it be banning or legalizing these things at a ridiculously low tax rate. We have not endorsed any specific legalization effort… If we’re going to go down the regulatory path, certainly, tax parity is at the top of the list.

“In Pennsylvania, the regulated gaming entities, whether it be a casino, mini-casino or truck stop, pay a very high effective tax rate on all those machines, so introducing some other type of machine at a different tax rate is going to be met with resistance, because there’s inherent unfairness there.”

Tres York, the AGA’s vice president of government relations, says one of the strongest features of the Gebhard bill is the distributed gaming model. “A true distributed gaming system has a central monitoring system, where the machines are actually hooked up to a central location that the government monitors,” he says. “That allows for real-time transparency as to where money is going.”

AGEM President and CEO Daron Dorsey says that while picking one regulation bill over another is a matter of policy for lawmakers, any legislation should create a level playing field. “Regardless of whatever forms of gaming are authorized in a particular jurisdiction, all of them playing by the same rules and the same sort of framework is a good thing for us from a supplier perspective,” Dorsey says.

He adds that the benefit of the Gebhard bill is that it maintains the same regulatory framework for all gaming. “Whether it’s a land-based environment or the VLT distributed market, they should all play by the same rules,” he says. “For anyone and everyone that’s participating in this, if it’s a new market, (skill game suppliers) should go through PGCB licensing and authorization just like everybody else.”

Pace-O-Matic, on the other hand, is lobbying hard for Yaw’s bill. “Pace-O-Matic vehemently opposes Senate Bill 756 for a number of reasons, primarily its impact on small businesses and fraternal organizations,” Carr wrote in his statement.

“This bill is intentionally written to overregulate and overtax skill games out of business… Struggling small local businesses and fraternal organizations cannot afford to pay an effective tax rate of 40 percent. Imposing this tax rate—the largest tax increase on small businesses in Pennsylvania’s history—would mean that many locations that have come to rely on the income from skill games will no longer be able to afford them.”

Greenwood Gaming’s Hausler disputes this. “I’ve got 2,000 employees and pay 54 percent tax, and so does every other casino in the state, so the notion that you can’t tax these machines because the businesses won’t survive is just patently false. In fact, I think they would do better under SB 756 because it limits the locations.

“The people getting really hurt right now are the VFWs and the nonprofits, because they’re competing with (skill game) mini-casinos that have popped up everywhere across the state. That’s just a fact. If you cut the supply in half, the win per unit will increase. They should generate more revenue and they will be safer for the consumer, which is the most important thing.”

Pace-O-Matic declined to answer GGB questions regarding consumer safety, KYC and responsible gaming safeguards of its Pennsylvania Skill machines, but POM’s Carr made it clear in his statement that its games should not be regulated by the gaming board as provided under the Gebhard bill.

“According to the PGCB’s website, the agency is tasked with ‘the regulation of casino and internet-based gambling, sports wagering, video gaming terminal (VGT) gambling, and fantasy sport games.’ Our games fall under none of these categories and are fundamentally different than these products,” Carr wrote.

“Conversely, the Department of Revenue, through the lottery, has a long history of working with the commonwealth’s small businesses and fraternal clubs. Additionally, it is important to note that, despite the absence of any jurisdiction or authorization, the PGCB has historically and continuously opposed the skill game industry. Therefore, not only are skill games outside of the defined purview of the PGCB, but their longstanding adversarial position makes the agency unfit to regulate the skill game market.”

“The Yaw bill doesn’t provide the same level of consumer protections that the Gebhard bill does,” counters Hausler, “and the fact it would allow somebody besides the Pennsylvania Gaming Control Board to regulate these games on its face is absurd. Why on Earth would you have someone besides the entity exclusively charged with regulating gambling in the state regulate a series of games?

“The Gebhard bill has a tax enforcement and regulatory structure which is similar to what VGTs currently have. The Yaw bill does not. The Yaw bill tax is laughably low when you think about VGTs at truck stops, which are doing just fine.”

In fact, he says, truck stops are profitable gaming locations despite a 52 percent tax, partly because of the variety of games from major manufacturers like Aristocrat, IGT and Light & Wonder.

“None of the big slot machine manufacturers will come into Pennsylvania and provide games of skill because they don’t do gray markets,” Hausler says. “Once you have a taxed and regulated market, you will have a product available to these clubs and VFW locations that they currently don’t have, and the quality of that product will be excellent because it will be a fully regulated and taxed product that is built and manufactured by companies who’ve been doing this a very long time.”

Both bills were referred to the Senate Community, Economic & Recreational Development Committee. As of press time, the panel had held no hearings on either.

Going forward, Pennsylvania stakeholders will be watching for what happens first—a law regulating skill games or a decision on their legality from the Supreme Court.

Action on either front could render the other front moot.