Last week in Pennsylvania, 12 casinos joined in a lawsuit. The suit seeks relief from the tax burden imposed on operators of slot machines. The casinos argue that it is not legal to charge casinos 54 percent of their slot revenue as a tax, while permitting the operators of the “skill games” to pay nothing.
The casino case is easy to understand. Casinos in Pennsylvania pay a higher gaming tax than in any other state. The slot tax is about $1 billion a year. A hefty fee by any standards. The casinos, besides paying the tax, have also invested hundreds of millions of dollars in licenses, infrastructure, and payroll. The casinos would like to pay less, but just as important, they would like to stop the spread of skill games. According to an AGA estimate, there are 67,000 skill games in the state compared to 25,000 slot machines. The issue will not be easily resolved.
There is more than one issue involved. One is taxation. Up to this point, the skill games have evaded paying a gaming tax. The second is skill versus gambling. It sounds straightforward, but it is not. Skill versus chance has been to court before. In 2012, a court in New York ruled that poker was a game of skill, not a gambling game. Although poker meets most of the tests for a game of chance, with a random distribution of the cards and an award, winning the pot, according to the judge it is also a game of skill. Skill is a significant element.
The modern computer-based skill games are not quite as straightforward. There is no random number generator and the game pattern does repeat, allowing a player to learn and adapt. The skills required are hand-eye coordination, memory of previous games, and patience — waiting for the right moment to pull the trigger. According to one manufacturer, a skilled player could potentially win every play. In theory, the house has no built-in mathematical advantage as it does with a slot machine.
There are other related cases in the courts in Pennsylvania. In November 2023, the Commonwealth Court ruled that Pace-O-Matic Pennsylvania Skill games are legal games of skill. Thus, they are not gambling games and not illegal under state law. The state is appealing the ruling and the Supreme Court of Pennsylvania has agreed to an appeal. In addition, Pace-O-Matic has filed several lawsuits defending its position and challenging local laws restricting the use of the games.
Pace-O-Matic maintains, and thus far the courts have supported, the contention that its games are strictly skill games, with no gambling involved. Pace-O-Matic further maintains that because of the skill element, its games are not subject to gaming regulations or taxes. The company has used the same argument in other states. Pace-O-Matic currently has games in Wyoming, the District of Columbia, Virginia, Texas, Kentucky, and Illinois. It may have games in other states, as skill games are an issue in Missouri, Ohio, North and South Carolina, and more. It is a gray area.
That gray area is the preferred home of Michael Pace, founder of Pace-O-Matic. Pace has been active in game design and distribution for over 45 years. He has used leading-edge technology to create unique games. Pace’s games are intended to be just outside the realm of gambling legislation, regulation, and taxation. He has had several companies and games over the years. He started Pace-O-Matic in 2001. And Pace is no stranger to litigation.
Even if Pace-O-Matic loses in Pennsylvania, it still has a thriving business in other states. In Wyoming, the only state that reports the numbers, the skill games generate over $40 million in revenue and pay $5 million in taxes. And in true Michael Pace style, he will probably develop new games seeking to exploit other loopholes. Pace has made a very very successful career walking a thin line between the legal and the illegal, that infamous gray zone. It is a zone he knows better than others.
In Pennsylvania, the Supreme Court will find it difficult to define the skill required in the games. It is not easily found or defined. For the casinos, lawmakers, and regulators, the solution may be in convincing the state legislature to pass laws governing skill games. That is probably the end goal of the casinos in filing the lawsuit. A new law could make the games illegal or impose a tax that renders them unprofitable.
Regardless of the outcome in Pennsylvania or the career of Michael Pace, the difference between gambling and skill is going to become increasingly difficult to define. The definition of a gambling game that it requires a wager, a random chance outcome, and a prize is a 20th century analog definition. The games of the 21st century are digital with layered levels of skill and chance and they challenge that definition. The issue will appear in more than one legislature and subsequently in more than one courtroom. Like many things in the 21st century, new paradigms are needed to replace those of the 20th century.
