Virginia Lottery Welcomes Bills Banning "Gray" Games it Blames for Decline in Sales

Sunday February 9th 2020

The Virginia Lottery has won the first round in its fight against electronic gaming machines it says are cutting into its sales and ability to support schools.

The Virginia House and the Senate Finance and Appropriations Committee voted last week by large margins to pass bills that would ban the digital betting games. The House voted 80-15 and the Senate Committee 14-2 to approve proposals that would see the machines disappear entirely.

The games "have been detrimental to the lottery," said Senate Minority Leader Tommy Norment, Republican of James City, who cosponsored the bipartisan Senate bill.

There are over 9,000 of the so-called "skill" games in Virginia. They are not regulated or taxed, and there is no minimum age requirement for players.

The electronic video games are installed in locations such as restaurants and convenience stores across the state, and their numbers have grown quickly over the last two years.

They are also called "gray" machines because they operate in a gray area of state law. Operators say they are games of skill, meaning they are legal under current Virginia law. Critics say they are games of chance and therefore illegal.

The best-known game is Dragon Ascent. Like a traditional arcade game, it features joysticks and colorful graphics, with players aiming to shoot dragons that cross the screen. In these games, however, players can win cash instead of points.

The Virginia Lottery sees the games as a serious direct threat to its revenue, and therefore its ability to contribute to public education in the state. The Lottery expects to lose $140 million in sales and $40 million in profits this fiscal year. It blames the drop in sales on the games installed at nearly 2,000 retailers who also sell lottery tickets.

“What’s alarming here ... is the acceleration of the deployment of these machines into the retail spaces where we conduct the overwhelming majority of our business,” said Kevin Hall, Executive Director of the Virginia Lottery.

In January, the lottery counted around 500 machines at retailers that sell lottery tickets, according to Hall. By August, the number of machines had jumped to about 4,500.

In the last fiscal year, the Virginia Lottery's profits surged to a record high of $650 million. However, in July and August, the first two months of the current fiscal year, profits declined by $23.8 million.

"It's not right that they are allowed to operate without any oversight and regulation, any rules of the road, any tax benefit to the locality or the state," Hall said.

The votes to ban the games are a serious roadblock for the manufacturers. "We're terribly disappointed with the vote," said Tom Lisk of Queen of Virginia Skill & Entertainment, which is owned by Pace-O-Matic, maker of Dragon Ascent.

Queen of Virginia has has installed 7,500 electronic games in around 2,500 locations in the state. "It's going to hurt thousands of small businesses ... that have been benefiting financially from using these games in their establishments," Lisk said.

The company would consider legal action if the assembly approves the ban and Gov. Ralph Northam signs it into law, Lisk stated.

Just last month, the future of the games looked very different. Gov. Northam was in favor of a bill to regulate them, impose a 35 percent tax on gross profits, and put almost all the money into public education.

However, the proposal failed in a House of Delegates committee after slot machine companies lobbied to end the legal distinction separating games of chance and skill, which would have allowed slots to legally compete with "skill" games in Virginia.

Whether "skill" games are currently legal in the state "is a true gray area," said Henrico Police Chief Humberto Cardounel.

Georgia-based Pace-O-Matic projects that the games could contribute up to $300 million per year in state taxes if they remain legal. "While we understand and share the legislature's concern with the proliferation and operation of illegal slot machines, we believe the better solution would be to regulate and tax the skill game industry," the company said.

Gov. Northam "is carefully monitoring the legislation moving through the General Assembly," said spokeswoman Alena Yarmosky. "While the General Assembly continues to debate this issue, any legislative action must address school funding. The governor has made it clear that taking money away from schools is unacceptable."

The General Assembly is also considering legalizing casinos in five cities and approving sports betting. The lottery may also be allowed to sell tickets online.

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