Monday, March 4, 2024

Virginia Explained: The Never-Ending Battle over Skill Games

A row of deactivated Queen of Virginia skill games at a Richmond convenience store no directs patrons to contact state lawmakers to support the legalization effort. (Graham Moomaw/Virginia Mercury)

RICHMOND — No matter how many times Virginia tries to ban so-called skill games, it never seems to stick for long.

Over the last five years, the skill game industry — led by Georgia-based company Pace-O-Matic — has beaten back numerous efforts to outlaw its slots-like game machines found in convenience stores, bars and truck stops across the state.

After nearly two years of operating with no regulation or taxation due to an ongoing lawsuit, the machines went dark late last year after the Supreme Court of Virginia indicated the General Assembly’s 2021 decision to ban the machines was a valid exercise of the legislature’s powers to restrict gambling. In court, the industry had argued the ban was an overreaching, business-destroying attempt to suppress video games that have a surface-level resemblance to slots but technically shouldn’t count as gambling.

Skill game backers aren’t accepting defeat, and the battle has returned to the political arena as the industry makes an all-out push in the General Assembly to get its machines turned back on under a new tax and regulatory framework.

Backed by a powerful bipartisan group of lawmakers and a large contingent of business owners who feel the state is cruelly yanking away a revenue stream they’ve come to rely on, the proposal appears to be on track to pass in the weeks ahead.

So far, the legislative discussion has focused less on the question of whether the machines should be allowed at all and more on how strictly they should be regulated if they’re going to stay.

The Senate is advancing a five-page bill with lighter rules preferred by the industry. A group of mostly pro-skill game senators also refused to allow the Senate bill to be heard by the committee that usually handles gambling regulation. On Friday, a 71-page substitute bill was introduced in the House of Delegates that takes a tougher regulatory stance, notably by requiring local approval before the industry could turn its machines back on in any particular city or county.

Over the next month or so, those dueling pieces of legislation will have to converge into something capable of passing both chambers and winning approval from Gov. Glenn Youngkin, whose administration has signaled support for skill games in the past.

Here are the specifics on what’s happening:

Who’s for the machines?

Several groups representing gas station owners and restaurateurs are advocating for the bill, and initial hearings have been flooded with skill game supporters wearing yellow shirts to support the cause.

Proponents have highlighted the fact that many of the affected convenience store owners are first-generation immigrants trying to overcome a ban that’s hobbling their ability to pursue the American dream.

“It’s a chokehold on the future of small businesses,” Kunal Kumar, an advocate with the Virginia Asian American Store Owners Association, said of the skill game ban.

Rich Kelly, the owner of Virginia’s Hard Times Cafe restaurants, said skill game revenue kept many businesses afloat during the COVID-19 pandemic.

“And what’s going to happen now that the games are off? You’re going to find some of your local restaurants closing,” said Kelly, who’s now leading a group called the Virginia Merchants and Amusements Coalition.

Sen. Timmy French, R-Woodstock, speaks at a podium flanked by other pro-skill game legislators during a news conference kicking off the new push to get the machines taxed and regulated. (Graham Moomaw/Virginia Mercury)

Pace-O-Matic, whose Queen of Virginia machines are believed to make up about half of the state’s skill game market, is also heavily involved in the effort. Its lobbyists have explained the finer points of the bill in committee hearings, and company representatives helped organize a press conference earlier this month that emphasized the voices of small business owners.

The pleas of small businesses appear to be the most significant factor swaying the General Assembly to reverse the ban.

At Friday’s House hearing, Del. Marcus Simon, D-Fairfax, said he had concerns about the machines but “a great deal of sympathy” for small business owners who in 2020 were allowed to host the machines for one year to help the state generate money for a COVID-19 relief fund.

“During COVID, when things were bad, we let them have the machines and we took the money. We used it. We spent it,” Simon said. “And now we’re telling them that they can’t have their cut of it anymore because we don’t need our cut.”

Though the legalization effort is largely framed as a fight for the little guy, Pace-O-Matic has become an influential political force in the state as a major donor to both Republicans and Democrats.

The company itself made $67,500 in donations this year before the session began, adding to the more than $1 million the company has donated directly to Virginia politicians, according to the money-tracking Virginia Public Access Project. A company-affiliated PAC, Va Operators for Skill, has donated another $800,000. Several company executives have also made donations in Virginia. Paul Goldean, the company’s Charlotte-based president and CEO, has donated roughly $200,000.

Political leaders in both parties and both General Assembly chambers have accepted donations tied to the company, as have the legislators sponsoring the bill to legalize skill games.

Who’s against the machines?

Skill game supporters have long argued opposition to the machines is driven largely by Virginia’s newly formed casino industry and its desire to eliminate games that compete with traditional slot machines.

Casino interests, which have also made sizable political donations in Virginia, are indeed opposing the bill introduced for the 2024 legislative session. A casino-backed group calling itself Virginians Against Neighborhood Slot Machines is running an anti-skill game campaign pushing back on what it says are the industry’s “inaccuracies and false claims.”

“The reality is these games line the pockets of huge corporations and are exploitative and predatory to vulnerable community members,” Virginians Against Neighborhood Slot Machines said in a statement opposing the bill.

Representatives from Virginia’s horse racing and charitable gaming industries, both of which offer gambling machines that look like slots, are also opposing skill games, arguing that legalizing them undercuts regulated gambling by rewarding an industry that rushed into Virginia without seeking lawmakers’ permission first.

Casino industry representatives argue their concerns go beyond self-interest.

In an interview, Chris Cylke, a senior vice president for the American Gaming Association, said Virginia lawmakers appear to be zooming past serious questions about how to require the skill game industry to comply with the same type of rules and oversight applied to casinos, such as security and consumer protection measures, age verification protocols and a self-exclusion list that lets people with gambling problems ban themselves from putting more money at risk. Maximizing profitability for small businesses, Cylke said, isn’t the only policy concern in play.

“Does everybody like more money? Absolutely,” Cylke said. “If all we cared about was driving small business revenue, we could certainly allow convenience stores to do any number of activities that are otherwise highly regulated, whether it be loan sharking, selling prescription drugs, adult entertainment or selling firearms.”

The socially conservative Family Foundation has told lawmakers Virginia has too much gambling already and shouldn’t allow more even if skill games could be regulated as tightly as casinos.

Is it gambling?

Under current law, skill games are considered a form of illegal gambling. Some Virginians who call the state’s gambling addiction hotline have said skill games feed their addiction. Like other gambling legislation recently passed in Virginia, the bill to legalize skill games would set aside money to fund gambling addiction resources. And skill game supporters agree that children shouldn’t be allowed to play the machines.

But the industry and its backers insist it’s not gambling.

“Unlike gambling, a skillful player can win every time they play the games,” read a text message recently sent to Richmond-area cell phones urging recipients to tell a local legislator to vote yes on skill games.

Asked last week if she considers skill games a form of gambling, Sen. Louise Lucas, D-Portsmouth, said the label itself means the machines aren’t the same as what you’d find in a casino.

“There’s a difference,” said Lucas, a key backer of the bill to legalize skill games. “You find it right in the title.”

Carolyn Hawley, a Virginia Commonwealth University professor who’s one of the state’s top experts on combating gambling addiction, said that from a problem gambling perspective there’s “really no difference” between skill games and slot machines. Skill games are routinely among the top three activities callers identify when they seek help from the state’s gambling addiction hotline, she said. From a harm reduction standpoint, Hawley said, claims that skill games aren’t gambling and can be beaten every time are “very misleading.”

“It presents an illusion of control for consumers that we know also helps facilitate gambling disorders,” said Hawley, who serves as president of the Virginia Problem Gambling Council and director of the state-funded Virginia Partnership for Gaming & Health. “When we’re telling people that the activity that they’re doing is not gambling, they’re not going to associate the problems that they’re having as being gambling. They’re not going to reach out for help.”

State law defines gambling as placing wagers on any game, contest or event to win something of value when the outcome is “uncertain or a matter of chance.”

Sen. Jeremy McPike, D-Prince William, who has introduced an alternative bill that would provide tougher regulation for a broader range of electronic games in convenience stores and restaurants, said the gambling hotline data convinces him skill games are a form of gambling.

“From my standpoint, skill games are just like slots,” McPike said. “You put money in. You hit a button. You win or lose.”

Skill games can take several different forms. The most prominent Queen of Virginia games are an approximation of slots, featuring a nine-square grid of symbols generated by the machine with each play. The goal is to get a winning three-in-a-row pattern — similar to tic-tac-toe — that can run horizontally, vertically or diagonally. Unlike slots, the player has to touch the screen to connect a pattern, typically by picking one square as a “wild” symbol that completes one or more lines or by nudging symbols up or down to complete a line.

A screenshot from a Pace-O-Matic game. (Pace-O-Matic)

Like slots, the more a player wagers, the higher the potential payouts go. Symbols that come with the highest-value prizes appear most infrequently, and the lowest-value symbols are the most common. Successfully completing a pattern doesn’t guarantee a player is winning money, because some symbols pay out less than the amount of the original wager.

Though skeptics see a glaring disconnect between the industry’s promises of constant wins and the mathematical reality that the machines only generate profits from players losing, at least one person believes he’s mastered what he describes as the loophole.

A YouTube user named JeffTheHokie has published a series of how-to videos explaining a system that he says can provide steady wins for players willing to train their brains with memory techniques and sit at Queen of Virginia machines for hours on end.

After each losing play, the machines give users the option of playing a memory-based subgame called “Follow Me” that allows them to win back what they lost plus a little extra if they can successfully remember and repeat a 20-step pattern playing out on screen.

On his YouTube channel, JeffTheHokie opines that the memory game is designed to be as boring as possible (it includes several 15-second intermissions that slow things down) so most players won’t bother with it. But by stopping the regular game and taking 8 or so minutes to beat the memory game after each losing spin, JeffTheHokie says, a trained player wagering at the $5 level can keep pursuing jackpots without fear of losing that $5. The only limit, he says, is “fatigue.”

“It makes the difference between this being a slot machine that takes your money and a slot machine that lets you cancel out ALL of your losses,” JeffTheHokie said in the comment section below one of his videos when skeptical viewers suggested his system might not be worth the effort for people who can’t treat the machines as a full-time endeavor.

While others might blow through hundreds of dollars playing on luck, JeffTheHokie went on to say, his method allows him to occasionally win several hundred or even a thousand dollars per session.

“Often (about half the time) I break even, but I never lose,” he said.

JeffTheHokie’s YouTube page doesn’t list contact information so he could not be contacted for this article. But his videos have drawn enough notice that he makes a cameo in court filings debating the prevalence of theoretically perfect players. The fact that the industry hasn’t gone bankrupt at the hands of JeffTheHokie and others like him, gambling consultants argued in a report prepared to help the Virginia attorney general’s office defend the ban, shows most players don’t spend huge amounts of time at the machines just to repeatedly win back their $5.

Skill game backers argue that how players choose to use the machines is less relevant than their technical setup, which lets exceptional players achieve nonstop wins as long as they perfect a multi-layered, time-consuming process.

Pace-O-Matic representatives denied that the intermission-laden memory game is intentionally monotonous to discourage its use but declined to provide statistics on how often players choose to play it.

How much money is involved?

Skill game proponents say the regulatory scheme they’ve designed, which would impose a 15% tax on gross revenues from the machines, could generate up to $200 million in new tax revenue per year divided between state and local governments. That estimate would put the industry’s total gross revenues somewhere around $1.3 billion per year.

The exact amount of revenue would depend on how the state chooses to regulate the machines. The industry-backed bill would allow up to five machines at each restaurant or convenience store licensed by the Virginia Alcoholic Beverage Control Authority, and up to 10 machines at truck stops.

That bill also doesn’t include a cap on the total number of machines allowed statewide. The lack of a cap has led casino lobbyists to argue the bill would allow as many as 90,000 machines in Virginia based on the number of ABC licensees. When skill games were subjected to light ABC oversight from 2020 to 2021, agency data showed a little more than 10,000 sanctioned machines statewide.

Lawmakers are also considering imposing caps on the machines’ wagers and payouts. The industry-backed Senate bill would set a $5 maximum wager, with payouts capped at $5,000.

The alternative bill that won initial approval in the House has lower stakes, with wagers limited to no more than $1 and a $500 max payout for each play.

The House bill, crafted by Del. Paul Krizek, D-Alexandria, also allows fewer machines at each location, limiting truck stops to five machines and convenience stores to two. Additionally, Krizek’s bill would set a 30% tax rate on the machines, double the rate envisioned in the Senate bill.

What are the other differences between the House and Senate bills?

Instead of ABC regulating the machines, Krizek’s bill would give that responsibility to the Virginia Lottery, which already regulates casinos and sports betting.

The Senate bill aims to get the machines back on by July 1, but the House bill envisions Jan. 1, 2025, as a more reasonable start date given the bureaucratic work required to set up a new regulatory structure.

Krizek, the co-chair of a General Assembly subcommittee taking a broader look at whether the state should create a single gambling oversight agency instead of spreading those duties among numerous departments, noted that he too is the son of immigrant parents and understands the “work ethic” of newcomers pursuing success in America.

“This is a great nation. And hard work will get you a long way,” Krizek said Friday. “But I do remain troubled by the scale at which these devices expanded.”

Saying even he’s not fully convinced his legislation is a good idea, Krizek gave a lengthy presentation last week on the “more robust” regulatory features of his bill.

The House bill Krizek drafted would prohibit the Lottery from granting any skill game licenses unless a locality has explicitly approved the machines via the passage of a local government ordinance or direct approval from voters through a ballot referendum. The Senate bill has no such requirement.

The Senate bill doesn’t have clearly defined protocols for preventing access to the machines by minors and people struggling with gambling addiction. The House bill would require skill games to have clearer disclosures on problem gambling resources and would subject the machines to the voluntary exclusion programs that already exist for other types of gambling.

The House version includes tougher age verification checks, requiring players to verify they’re 21 or older before being issued a card that can be used to play skill games. The House plan also makes it a criminal offense for any business to allow underage play. The Senate bill would require stickers on each machine saying no one under 21 can play but doesn’t lay out specifics on how that rule would be enforced.

While the current Senate bill would rely on the skill game industry to self-report its revenues, the amended House bill would require a “central monitoring system” giving regulators direct oversight of how much money is flowing through the machines.

Del. Carrie Coyner, R-Chesterfield, asked if the House bill could be beefed up in other ways, such as ensuring the machines aren’t wedged into tight areas of convenience stores in a way that impedes Americans with Disabilities Act compliance and potentially capping how many machines can be located in economically disadvantaged areas.

The House gambling subcommittee approved Krizek’s bill by a 6-0 vote.

There was some tension at Friday’s meeting over the dramatic rewrite of what began as industry-friendly legislation. Del. Cliff Hayes, D-Chesapeake, the original sponsor of the bill before Krizek overhauled it, said his side had told supporters not to attend after seeing the new version drop roughly 24 hours prior to the hearing.

“There’s an opportunity that we can’t get back,” Hayes told Krizek. “Those individuals are not here to speak their case.”

Krizek said he was unaware skill game supporters had been told to skip Friday’s meeting, which began late in the afternoon and stretched into the early evening, but felt it was important to fix what he called the “very scant” regulations in the original bill.

“You decided on your own to not invite your folks to come,” Krizek said. “We put this in the biggest room in the General Assembly so that you could have everybody here. We’re willing to go as long as it takes. I don’t want it to be said that we didn’t give you that opportunity.”

On Friday night, the business coalition backing skill games released a statement saying its members “remain committed” to the original version of the bill.

Virginia Mercury is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. Virginia Mercury maintains editorial independence. Contact Editor Sarah Vogelsong for questions: Follow Virginia Mercury on Facebook and Twitter.

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