Last month, Pennsylvania lawmakers proposed a skill games tax to help bridge a large budget gap for the coming fiscal year. But unintended consequences of the proposed tax could lead business owners and customers to respond in ways that may undermine the bill\u2019s effectiveness if enacted.<\/p>\n
In the words<\/a> of state Sen. Anthony Williams (D), the General Assembly has found \u201cnot a life boat,\u201d but rather \u201ca yacht, if you will, in the budget conversation.\u201d This vessel is Senate Bill 1079<\/a>, a proposed regulatory framework and $500 per-terminal monthly tax on skill games terminals, gaming machines that don\u2019t just rely on chance and which are popular with small businesses such as taverns, truck stops, and social clubs.<\/p>\n Multiple proposals for a tax on skill games have been floated this year, from Gov. Josh Shapiro\u2019s (D) 52% tax on revenue from skill games terminals; to the midyear SB 756<\/a> proposing a 35% revenue tax; to the bipartisan SB 1079, introduced on Oct. 27 by Williams and state Sen. Gene Yaw (R).<\/p>\n While policymakers seem to focus on what tax rate should apply to these games, the question remains whether any of these proposed taxes would deliver the General Assembly\u2019s desired result.<\/p>\n From a political perspective, taxes on gaming tend to be winners\u2014gaming is a leisure activity, and its tax\u2019s benefits are usually apparent. SB 1079 is projected to raise $300 million annually, almost half of which would be allocated to public transit and infrastructure and the commonwealth\u2019s Clean Streams Fund.<\/p>\n Yaw also describes it as a jobs bill aimed at protecting the jobs of waitstaff at taverns and social clubs that host skill games terminals, as well as the Pennsylvania employees of companies that manufacture and distribute the terminals.<\/p>\n Supporters of a tax argue that skill games fall outside of Pennsylvania\u2019s Gaming Act and therefore are unregulated and untaxed. Much of this push appears to be fueled by concerns over installation of skill games terminals in \u201cstop-and-gos\u201d\u2014that is, businesses with liquor licenses that don\u2019t maintain restaurant licensure.<\/p>\n Although most agree that well-tailored regulation designed to balance community needs is generally good, disagreement lies in how to accomplish those goals. Opponents of tax proposals have argued that Pennsylvania could implement an appropriate regulatory scheme to require licensure and operating standards without adding an excessive level of taxation to the regulated activity. Others argue that the added state-level tax, among other things, is necessary to fund the regulation.<\/p>\n Yaw said the potential tax revenue from the activity is \u201clike having a winning lottery ticket worth a lot of money, and it\u2019s laying there on the table.\u201d However, even if taxing the activity makes sense in theory, SB 1079\u2019s proposed mechanism may not be the optimal solution.<\/p>\n If SB 1079 is implemented, businesses would need to pay a $500 per-terminal monthly tax before the terminal can be played. If a business hosts the maximum five terminals allowed under SB 1079, this produces a $6,000 monthly tax bill before a single penny of revenue comes in. <\/p>\n This upfront fee would provide the commonwealth with immediate revenue that wouldn\u2019t need to wait on businesses to file quarterly or annual returns. The tax\u2019s flat-fee nature would provide certainty and enable businesses to budget accordingly.<\/p>\n But as a matter of policy, taxes generally should be based on realized income or completed transactions so taxpayers have the funds on hand to pay the tax. Pennsylvania has followed this rationale in imposing other taxes on gaming, such as taxing certain percentages of gross terminal revenue for slot machines<\/a>, sports betting<\/a>, and internet interactive gaming<\/a>\u2014all of which are based on revenue determined after the fact.<\/p>\n While regulated gaming operators do pay hefty upfront initial licensing fees, these are industry-standard anticipated costs of doing business. By contrast, a longtime neighborhood social club may not be in a financial position to absorb the cost of an upfront fee before even generating revenue.<\/p>\n Such a business may choose to remove (or not install) skill games terminals if they no longer make economic sense. Or the tax may result in businesses increasing consumer costs, thereby potentially reducing demand for the skill games.<\/p>\n Many small business owners may worry the proposed tax would be untenable and that their primary businesses would also suffer as a result. However, if the popularity of the games remains strong, lawmakers may have found some much-needed extra cash to fund long-term needs.<\/p>\n It is uncertain whether the top line tax revenue that Pennsylvania lawmakers are looking to collect from a skill games tax would impact the bottom line as expected.<\/p>\n This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.<\/p>\n Author Information<\/p>\n Tamara Savin Malvin<\/a> is a litigation partner at Akerman in Florida, focused on gaming and hospitality sectors.<\/p>\n Stefi N. George<\/a> is chair of Akerman\u2019s state and local tax practice in New York.<\/p>\n Dakota S. Newton<\/a> is a tax associate at Akerman in Chicago.<\/p>\n