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As skill game machines, offshore gambling sites and online sweepstakes casinos have proliferated across the U.S., gaming regulators find themselves in the untenable position of trying to stem their negative impact on consumers, the industry and state coffers. 

In Tennessee, thousands of coin-operated amusement machines are not under the jurisdiction of gaming regulators, while north of the Mason-Dixon line, skill games remain a topic yet to be solved by either the Pennsylvania Supreme Court or state legislature.

“The machines are all over the state and the only legal gaming in Tennessee is the lottery, and then we regulate online sports and fantasy sports," said Stephanie Maxwell, deputy director and general counsel with the Tennessee Sports Wagering Council.

“So, there’s no regulatory body and the coin-operated amusement devices statute basically just says ... that you have to pay a very nominal annual fee to the Department of Revenue,” Maxwell said during a panel discussion on Monday (March 3) at the Gaming Law, Compliance and Integrity Bootcamp hosted by Seton Hall Law School in Newark, New Jersey.

Tennessee does not tax these terminals but requires an annual license tax to be paid by owners of coin-operated amusement machines. Owners of fewer than 50 machines pay $500 each year for a master license, those owning between 50 and 200 machines pay $1,000 annually, while those who own more than 200 machines pays $2,000 every year.

After payment is received, the revenue commissioner issues a decal to be affixed to each machines that the tax has been paid.

“They are all over,” Maxwell said. “They are in gas stations, convenience stores and we get calls all the time. They look like slot machines and people think we regulate them. We basically have to say you should call your district attorney.”

Maxwell said the issue is that in Tennessee, state law code says that “gambling is contrary to the public policy of the state but then exempts sports wagering and fantasy sports.”

“Then it says that gambling is risking anything of value for profit whose return is to any degree contingent on chance,” Maxwell said. “So, under our gambling code, if there’s any chance involved, then those machines are illegal. So, they’re just sort of in this zone out there right now with nobody to regulate them.”

In Pennsylvania, skill games is once again on the legislative agenda with top Republican Senate leaders calling for the regulation and taxation of the devices, and Governor Josh Shapiro, a Democrat, proposing regulations for the second year in a row to regulate skill games in his 2025-2026 budget address.

In his address last month, Shapiro estimated there are 70,000 unregulated skill game terminals across Pennsylvania, which have cost the state lottery an estimated $200m over the last five years. Shapiro’s proposal would allow 30,000 skill game terminals in 2025-2026, increasing incrementally to 40,000 machines by 2029-2030.

Each establishment would be permitted to have a maximum of five machines, and gross revenues would be taxed at 52 percent, near the 55 percent rate on slot machines. Republican Senator Gene Yaw has introduced legislation with a proposed a tax rate of 16 percent.

Commonly branded as Pennsylvania Skill, the machines developed by Pace-O-Matic are the dominant terminals in the marketplace. The company opposes a 52 percent tax on its machines, insisting that would make the operation unviable and leave no money left to be shared with the bar or convenience store hosting the devices.

“Because of the prominence of these machines across the Commonwealth, and the political argument that has been raised by the skill games industry … that these machines in a business creates a cash flow for mom and pop businesses,” said Steve Cook, chief counsel for the Pennsylvania Gaming Control Board.

“So, that’s where a lot of political support for the concept of having these things put there comes from,” Cook said. “There is some though in the General Assembly that maybe we’ll just pass legislation and regulate these (machines)."

Shapiro estimates there are 70,000 machines in the state, while Cook told attendees at Seton Hall Law School the figure is anywhere between 60,000 and 100,000. The governor’s proposal to cap the number machines initially at 30,000, “well if we have at least 60,000 now, how do you do that? How do you roll that out?” Cook asked.

Cook explained that the argument over a 52 percent or 16 percent tax rate, creates additional problems about uniformity taxation. He said the Pennsylvania Constitution requires all taxes on similar products be taxed uniformly.

“And if these are similar enough to slot machines, they should be taxed the same as slot machines,” Cook said.

Cook and Maxwell were joined by David Murley, deputy director at the Michigan Gaming Control Board (MGCB), Louis Rogacki, deputy director and assistant attorney general with the New Jersey Division of Gaming Enforcement on a panel moderated by Frank DiGiacomo, an attorney and partner with Duane Morris.

“We’ve been very aggressive going after, really, any type of illegal online gambling, both sweepstakes and offshore casinos,” said Murley of the MGCB. “We’re fortunate in that our statutes give us a lot of latitude to do that.”

Murley expressed sympathy for Cook and his fellow regulators in Pennsylvania who are dealing with thousands of illegal machines and the statutory problems, as well as the politics of getting them fixed. He said the regulations in Michigan broadly state that anything not in statute is illegal.

“Well, it’s not ancillary to your business, like McDonald’s and their sweepstakes,” Murley said. “So, we have been able to make headway and say … this is gambling. It’s all illegal and so far we’ve sent cease-and-desist letters, and thus far, we’ve been pretty successful.”

Last month, the MGCB issued its latest cease-and-desist letter to BetNow.eu Sportsbook, Casino and Racebook, another offshore site operating illegally in the state. BetNow has 14 days from February 24 to cease offering gambling services to Michigan residents as required by the cease-and-desist order.

“The sweepstakes companies have backed out and online gaming companies have done so also,” Murley said.

“But the problem is the other ones (that) take their place. There’s always someone out there trying to navigate the walls and kind of present a product that is not gambling,” he added.