States are legalizing video gaming thanks to a significant revenue opportunity. A veteran legal observer notes the growth has just begun.
Legalized video gaming offers one of the fastest growing forms of entertainment available to people today, as states are finding it offers a source of revenue without raising taxes on the average citizen.
Entrepreneurs in the nine states already offering what’s becoming known as “convenience gaming” are already reaping big profits.
|Paul Jenson of Taft Stettinius and Hollister LLP outlines the future of video gaming, flanked by Sam Westgate, president of the Amusement and Music Owners Association at the Las Vegas Convention Center.|
Paul Jenson, an attorney in the Chicago office of Taft Stettinius and Hollister LLP, offered an overview of the growth, challenges and opportunities of “non-destination” gaming during the recent Amusement Expo International in Las Vegas.
While sports betting has gained a lot of attention in the media in the last two years, Jenson said opportunities in video gaming are more imminent for existing music and game operators, as well as the establishments they serve.
“It will be available in the next five years if it’s not already,” Jenson said. “The consumer preference for this type of gaming is clear.
“Never before have we seen more potential for growth, more discussion at the state legislature than we see today,” he said.
What is ‘convenience gaming?’
Convenience gaming, also known as “slot routes,” “route based gaming,” “distributed gaming” and “restricted gaming,” serves locations where guests congregate for other reasons than gaming, such as restaurants, bars and truck stops.
“These are low stakes types of games,” Jenson said. “They are not meant to compete directly with a casino environment.” First-win payouts range from $500 to $1,199.
Most states that have not yet adopted legalized convenience gaming are looking at Illinois as an example, Jenson said. Other states that have legalized video gaming include Pennsylvania, West Virginia, Louisiana, South Dakota, Montana, Oregon and Nevada, while Georgia has a form of video gaming consisting of slot machines with cash payouts.
The machines range in number from three to 50 per location, but locations typically have between five to 10 games.
Some states grant video gaming licenses to establishments with liquor licenses, while Illinois and Pennsylvania also allow them at truck stops.
Illinois steps forward
Illinois took a leadership role in convenience gaming when it was seeking to find new sources of revenue during the 2009 recession.
The Illinois Coin Operators Association approached the legislature and said it was a good time to legalize video gaming terminals in bars and restaurants and suggested the state license and tax game machines.
There were 50,000 or so “grey” games operating in the state at the time, Jenson said, and the state was not aggressively enforcing the law. The illegal games were untaxed and offered no consumer protections.
“It gave us a way to get rid of the 50,000 gray games that were out there,” Jenson said with regards to the Illinois law that became effective in October 2012.
Under the Illinois law, game manufacturers cannot operate the games and operators and establishments have to be separate. The operator cannot offer anything of value in exchange for a contract to place “VGTs” at the establishment.
Players cash out and get a ticket redeemed at a redemption terminal.
“We’ve taken the bar, the establishment completely out of the payout process for the most part,” Jenson said.
Minors are not eligible to play.
Local governments are required to adopt ordinances to participate in video gaming.
Operators placed the video gaming terminals in bars, restaurants, fraternal and veteran organizations with liquor licenses. They also placed them in truck stops which do not need a liquor license. The game operation hours were tied to the liquor license and 24/7 at truck stops.
“As you can imagine, truck stops became incredibly valuable locations in the market,” Jenson said.
A three-way revenue split
The tax rate was initially 30% and the operator and the establishment split the rest. The operator cannot offer the establishment a better split.
The maximum bet was set at $2 and the maximum jackpot was $500.
In some states, any felony conviction precludes a license. In others, if the conviction was more than 10 years old the gaming board has discretion on this. Gambling convictions also preclude a license, while crimes of moral turpitude within the last 10 years was a disqualifier in some states.
“The gaming regulator has a tremendous amount of discretion on almost every decision that happens with who is allowed to participate within their individual market,” Jenson said.
From 2012 to 2019, the industry steadily grew and accelerated in 2019.
The Illinois tax rose in two stages up to 34%. In exchange, every location was allowed a sixth VGT while truck stops were allowed to have 10. The maximum bet went from $2 to $4 and max jackpot from $500 to $1,199.
Today, there are 7,910 licensed establishments in Illinois operating 42,500 VGTs. This does not include the city of Chicago that has not yet opted in.
A financial windfall
The financial rewards have been significant for all parties.
In 2012, there was $1.64 billion in combined casino and VGT revenue that generated $548 million in taxes. In 2019, there was almost $3 billion of gaming revenue (for both casinos and VGTs) and $932 million in tax revenue.
In 2021, VGTs generated $841.5 million in tax revenue while casinos only generated $316 million.
Local governments benefit
“We saw that money spread all around the state to places that had never seen gaming tax revenue before,” Jenson said, noting that local communities do not get revenue from casinos.
In Pennsylvania, Michigan and New Jersey, combined tax revenue was slightly over $644 million in 2021.
As the convenience gaming market has grown, casino companies have bought amusement companies, Jenson said. Meanwhile, private equity companies and hedge funds that bought casinos over the last 20 years have recognized this newer form of gaming.
State adoption doesn’t happen quickly, however.
“Gaming legislation is incredibly difficult to pass,” he said. “That’s why you see these things take a while.”
Photo: Networld Media Group.