Gaming law

Complying With Small Games of Chance Act Is No Small Task

, Special to the Legal, The Legal Intelligencer

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Like it or not, gambling and alcohol go hand in hand. Only now Pennsylvanians will not have to travel to a casino to get their fill of both.

Within a few months, two of the Keystone state's greatest revenue sources—gambling and alcohol—are set to become even closer bedfellows thanks to Act 90 of 2013, or the Local Option Small Games of Chance Act.

After it narrowly passed through the state House of Representatives 102-96 and breezed through the Senate 34-15, Gov. Tom Corbett signed Act 90 into law Nov. 27, 2013, to allow bars and restaurants to offer pull-tab games, 50/50 raffles and other small games of chance. The legislation went into effect Jan. 27, when applications for the new gaming licenses became available to the public. However, since the Pennsylvania Liquor Control Board has up to six months to act on license applications, patrons might have to wait until the summer to start gambling in their favorite bars.

Act 90 is notable because it represents Pennsylvania's biggest gambling expansion since the legalization of casino table games in 2009. Additionally, this legislation takes games traditionally reserved for veterans' posts, fire halls and other fraternal organizations and spreads them to thousands of bars, taverns and restaurants.

The games now available to tavern gaming license holders under Act 90 include pull-tab and tip-board games with a maximum prize of $2,000, daily drawings much like the nightly lottery and raffles with at least 50 percent of the proceeds going to charity. Noticeably absent from this list are the ever-popular video poker machines.

Those eligible to apply for a tavern gaming license must hold an active restaurant liquor license, hotel liquor license, brewery pub license or a privately owned public golf course liquor license. Licenses are not available for grocery stores, casinos or caterers. Yet holders of liquor licenses that are in safe keeping or have been declared nuisances under Section 611 of the Liquor Code cannot obtain a tavern gaming license.

Most remarkable, though, is the enormous burden this legislation places on bar owners in terms of the application, taxation and record-keeping processes without accounting for ways to ensure proper financial compliance and the prevention of problem gambling.

The first likely obstacle for many bar owners is the cost and time necessary to apply for a tavern gaming license. Applicants must pay a nonrefundable $2,000 filing fee to the PLCB, which includes $1,000 to the Pennsylvania Gaming Control Board for an FBI background investigation. If the application is approved, applicants must then pay an additional $2,000 fee to the state's general fund to obtain the actual license. The state tacks on another $1,000 annual renewal fee per license. Unlike a liquor license, a tavern gaming license is nontransferable and no security interest may be placed on it.

In addition to the primary tavern application, every individual who owns 10 percent or more of the establishment, or serves as a manager or officer of the bar, must fill out an individual application form and disclose full financial, tax and criminal history. The PGCB will also review all unemployment compensation, workers' compensation and liquor license regulatory histories for each establishment.

Therefore, it is imperative before any bar applies for a tavern gaming license that it does its own homework on all of its owners and managers to make sure everything is in line before the FBI and the PGCB start investigating. An otherwise eligible application could be denied because of a minority owner's checkered financial or criminal past.

Most troubling about the extensive background checks is that the PLCB excludes any applicant with a felony conviction in the past 15 years from holding a tavern gaming license or even assisting in operating a tavern game. Section 914 of Act 90 prohibits employees of license holders from touching a game of chance if they have any prior felony convictions—so much for second chances.

If a tavern owner is able to successfully front the $4,000 in fees and complete the paperwork and background checks, they must then become master accountants (or hire one). Holding a tavern gaming license requires quarterly disclosures, maintaining a completely separate gaming bank account, and compliance with a hefty tax system. Pursuant to Section 909, 60 percent of the net revenue from tavern games goes to the state and 5 percent to the local municipality. At the end of the day, bar owners will keep 35 percent of the net revenue from tavern games, meaning they must generate a net revenue of at least $11,435 in the first year to recoup the initial $4,000 in expenses. State legislators who supported Act 90 estimate that the state will earn more than $150 million annually from these games.

Although the expansion of small games of chance is certainly a great opportunity for the state to earn new revenue, Act 90 appears to have overlooked the most troublesome aspects of any gaming system—tax compliance, safety and addiction.

For instance, traditional casinos employ trained personnel to work alongside state and local law enforcement stationed inside casinos to spot problem gamblers. Act 90 does not require any such training for tavern gaming license holders. Similarly, recovering gambling addicts or those who simply need help limiting their bets can place their names on self-exclusion lists at casinos or tell casinos in advance to cap their wagering. It is hard to imagine such self-awareness being encouraged inside a bar.

Act 90 does make it illegal to allow a visibly intoxicated patron to play a small game of chance, much like serving alcohol to someone who is visibly intoxicated is not allowed. From a liability standpoint, this is a nightmare.

Could a bar become civilly liable if an intoxicated patron blows his family's savings account on pull-tabs? Although unlikely, it is not a stretch to imagine such a claim popping up in due time, particularly in Philadelphia.

Even more surprising is the lack of strict tax compliance on behalf of the state. The state monitors every cent wagered at casinos. Count rooms are under heavy surveillance to ensure that the state gets its cut immediately. Likewise, the state lottery taxes its tickets at the point of sale.

In bars and taverns, though, it is up to the license holder to keep accurate financial records and pay the proper taxes. There is no live monitoring by the state. Curiously, Section 504 calls for the Bureau of Liquor Control Enforcement to conduct random, annual audits of 5 percent of private liquor clubs, but there is no mention of auditing taverns in Chapter 9 of Act 90.

Granted, the civil and criminal penalties for tax fraud should be enough of a deterrent, in theory. However, with estimates of more than $350 million being wagered annually on small games of chance, there is certainly plenty of temptation to not report every dollar wagered on the books. Without constant monitoring or a way to collect taxes at the point of sale, it seems as if the state has added an element of trust into this gaming system.

Ultimately, the success or failure of Act 90 is not measurable until the PLCB starts granting licenses this summer. Yet while the expansion of small games of chance into bars is an exciting opportunity for bar owners and a potential new revenue source for the state, the PGCB needs to tread lightly in any further gaming expansion. With a state lottery, small games of chance in bars, and 12 (soon to be 13) casinos, the saturation point for gambling is quickly nearing.

Steven J. Silver is an associate at Goldberg, Miller &  Rubin. He won the International Association of Gaming Advisors' Shannon Bybee Scholarship in 2012 and was recently published in the John Marshall Journal of Computer & Information Law for his research into the convenience casino industry. He can be reached at 215-735-3994.

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