Fighting Gray Gaming While Trying To Establish Distributed Gaming

By its nature, gray is, well, gray.

Not many people ponder whether a gray-skied day — without precipitation — is a good day or a bad day. It’s just there.

The phrases “shades of gray” or “gray area” imply a spectrum of slight differences and nuances — some barely perceptible — within the larger range between black and white, be it color or position on an issue.

And no one truly seeks out anything gray, except maybe for a suit, because the color is specifically nondescript. Consider: How many sports jerseys do you own with gray as the primary color?

At the National Council of Legislators from Gaming States meeting last week in Chicago, an International Masters of Gaming Law panel brought up gray areas in relation to distributed gaming. A lower-profile way for states to potentially raise tax revenue compared to sports betting and online casino gaming, distributed gaming may also be arguably the most difficult of these three methods because of unregulated gaming devices, regulation and legalization issues, and the potential cannibalization of casino revenue.

What exactly is a gray game?

In some respects, Chicago was the proper host for a discussion on distributed gaming, given Illinois is the nation’s leader when it comes to the primary method of distributed gaming — video gaming terminals (VGTs). But the period between when the Illinois Riverboat Gambling Act was enacted in 1990 and the Illinois Video Gaming Act’s passage 19 years later saw the Prairie State become a haven for gray gaming.

“In Illinois, we had about 60,000 gray games in operation,” explained Donna More, a partner at Fox Rothschild who previously served as general counsel to the Illinois Gaming Board. “When we talk about gray games, we’re talking about a number of different categories — amusement games where you earn credit and then people redeem those credits for cash; sweepstakes games where ostensibly you get a coupon to buy a product, but the coupon ends up in the garbage can next to the machine and you get to play a game of chance.

“And now in particular, skill games, which may or may not violate a particular state’s criminal code, depending on how you view the skill involved. So all these gray games were operating, and in some places, still operating, with no oversight. In Illinois, the best you had was that you had to buy a tax sticker for $100 a year. So in addition to no oversight, no one was paying taxes in a cash industry. The people who were winning weren’t paying taxes, the locations weren’t paying taxes, and in most instances, the people who were distributing the gaming weren’t paying taxes.”

William Bogot, also a partner at Fox Rothschild and former general counsel to the IGB, offered another notable aspect of what are labeled gray games. He pointed out it is “a device that hides its gaming characteristics.” Using older machines as an example, Bogot explained a patron could play a gray game of chance at a bar or tavern and win a free replay as opposed to a prize. That patron could then load up the free replays on a card, and the bartender would redeem the card for a prize or money before the machine resets to zero.

Getting law enforcement on board

Jessica Feil, vice president, government relations and gaming policy counsel for the American Gaming Association, feels educating law enforcement and lawmakers is a key component of combating gray machines. She cited two key obstacles currently being confronted, with one a game of “whack-a-mole” in which addressing gray gaming in one jurisdiction means it will simply pop up in another.

The other is the perception that gray gaming is a “victimless crime,” given a majority of the machines are located in bars and taverns. Feil pointed out “none of the protections or assurances that these machines are safe, have integrity and uphold responsibility are there.” She added responsible gaming is the biggest issue when dealing with gray games — there are no safeguards for minors and problem gamblers and establishments where those machines exist, and they are also not held to the same standards as the casino industry.

Carl Sottosanti, a former executive vice president and general counsel for Penn National, cited one incident from 2019 in Bucks County in Pennsylvania. A group there was brazen enough to essentially set up a “mini-casino” with approximately 70 machines at a strip mall, and it advertised testimonials of players winning. His group sent in a person to gather evidence. It compiled a dossier and produced a white paper for local legislators, law enforcement, and the district attorney’s office to eventually gain what he called a “real prosecution.”

Sottosanti added the upshot of this instance was that “once we educated local law enforcement about this, they’re actually thrilled about this” since Pennsylvania state law allows local law enforcement to keep monies seized.

Regulators, legislators, law enforcement can collaborate

One aspect that helped Illinois crack down on gray gaming following the passage of its Video Gaming Act was that any income-related violation is a Class 4 felony crime. Bogot said statutes “must define specifically what gray gaming is” since that is what gets litigated.

As a former prosecutor, More pointed out some district attorney’s offices “do not study gambling law all that closely,” but a bigger issue in getting potential prosecutions is the allocation of the office’s overall resources. She said that if there are “one to two cases and we educate you as to the easiest, quickest way to do it, that’s really all we need” to set a template.

Matt Roob, senior vice president of Spectrum Gaming, advised legislators to be “very specific in ‘the game’ to eliminate the preponderance of chance … in order to make sure the game is clearly defined so anyone can determine, ‘Yes, this is legal’ or ‘No, this is not.'”

Both Bogot and Sottosanti stressed including state gaming boards in the process at different levels. Bogot offered that gaming boards provide expertise when it comes to gaming elements, while Sottosanti said it was important that the board be given the authority by lawmakers to legally challenge gray gaming. He said some bodies get “their hands tied” by the language of authorized powers when their job is exclusively to regulate legalized gaming.

The business of distributed gaming

Distributed gaming is big business in Illinois for both operators and the state. The nearly $1.2 billion in net terminal income (NTI) through the first six months of 2021 already exceeded all of 2020, when the machines were out of operation for four months due to the pandemic. The $342 million in state tax revenue is on pace to more than double last year’s entire total of $325 million.

Pennsylvania also has legal VGTs but on a much smaller scale by design. They are restricted to truck stops that must meet certain requirements regarding the sale of diesel fuel, operation of convenience stores, and available parking spaces for trucks. The state’s Gaming Control Board reported a gross terminal revenue of $31.3 million for Fiscal Year 2020-21 from 49 sites, with the state collecting nearly $13.2 million from a 42% tax rate.

This revenue, however, does not exist independently — where in operation, VGTs challenge casinos for gaming dollars. The Illinois Commission on Government and Forecasting Accountability recently released a report that the state could have generated up to $230 million in tax revenue for the past 16 months with “fully implemented” online casino gaming, but it arrived at that figure with a 50% “reduction factor” in VGT revenue when in competition with iGaming.

Sottosanti opined that distributed gaming will only grow, which adds to the need for more regulations.

“I think this is going to be a very brisk business in the future. Gaming has become so commonplace. … States are not going to stop needing money,” he said. “Take a look at the example of the deal BetMGM struck with Buffalo Wild Wings to have gaming tablets there and promotions on sports wagering. It’s barely a hop, skip, and a step to what we’re talking about with distributed gaming.”