Rise Of Look-Alike Slot Machines Might Hurt Missouri's Education Funding
They look like slot machines. They sound like slot machines.
But they aren’t in casinos — which is the only place you are supposed to be able to find slot machines in Missouri.
Thousands of new gaming devices have been popping up at gas stations, veterans homes, union halls and fraternal lodges across the state. Their growing presence has raised the hackles of state regulators and the traditional gambling industry, which says the machines are draining business from them.
The impact could extend well beyond the world of casinos, bingo halls and lottery games. Gambling taxes raised at least $710 million for state and local governments during the last annual budget cycle. Most of that money goes to public schools and universities.
These new devices operate outside of the standard gambling world and aren’t subject to any gambling taxes or fees. They are often called gray machines, because of their appearance — many are physically gray on the outside — as well as their regulatory status.
That’s created a headache for lawmakers in Jefferson City. At a time when most people assumed the hot topic in gambling would be whether to legalize sports betting, the gray machines have taken center stage.
Rep. Dan Shaul, R-Imperial, said the machines are more controversial than any other gambling issue that will be tackled by the Missouri General Assembly next year.
At the heart of the issue is whether games played on the machines technically meet the definition of gambling.
“Right now it’s not clear in Missouri what is and is not legal,” said Shaul, the head of the Missouri House’s Special Interim Committee on Gambling.
One man’s slot machine is another man’s game
Like slot machines, a person can win money by playing games on gray machines. But state regulators don’t check the machines to make sure they are run fairly — as they do with slots.
A company spokesman for one of the companies that owns the gray machines, Wildwood-based Torch Electronics, argued they shouldn't be regulated.
The Torch machines run differently than a slot machine and don’t meet the technical, legal definition of a gambling device because they don’t host “games of chance or skill,” said Gregg Keller, Torch’s spokesman.
On a Torch machine, a player has the option to find out whether they will win cash before they play any of its games. That’s not true of a slot machine.
“Every single time someone plays on one of our machines, there is a button on the screen that tells them whether or not the next play that they are going to do is a winning play,” Keller said.
Keller said prosecutors have not been interested in bringing charges against Torch because they agree this feature of the games — in which players know whether they are going to win money on a particular game ahead of time — put them outside the reach of gambling laws.
But Stephen Sokoloff, general counsel for the Missouri Association of Prosecuting Attorneys, painted a different picture for lawmakers last month.
He believes the machines are illegal.
“In my opinion, there’s really not much of anything that you would be able to do to adjust machines so that they would be legal under current law,” Sokoloff said.
A player’s interaction with a Torch machine isn’t all that different from a slot machine, Sokoloff said. Gamblers will continue to play a machine to see if they win future rounds of a game, even if a Torch machine informs them that they aren’t going to win the one immediately in front of them, he said.
Prosecutors aren’t pursuing cases against Torch and other companies operating the machines — not because they believe they are legal, but because the prosecutors have limited resources, Sokoloff said.
Most prosecutors are waiting to see the outcome of a case involving gray machines in Platte County before investing time and resources into what is considered a “victimless crime,” he said.
“In 114 counties and the city of St. Louis, there’s a lot of other crimes that are out there. I would be foolish to suggest that there’s adequate personnel to handle everything that comes in the door,” he told lawmakers.
The Platte County case could take two years to resolve, and the Missouri Lottery, state gaming commission, and casino industry have said they can’t wait that long for the issue to be worked out. They are putting pressure on lawmakers to do something in the legislative session that starts in January.
What’s at stake
The Missouri Lottery and casino industry provide two major sources of education funding for the state.
In the last budget cycle, the lottery contributed $346 million to the state tax coffers. The bulk of the funding goes to education. For example, during the 2018-19 school year, about 11% of state funding for the University of Missouri system — $46.8 million — came from the lottery.
With a 21% tax rate, Missouri’s 13 casinos produced $328 million in state taxes and $71 million in local taxes during the state’s last annual budget cycle. A $2 admissions tax they have to pay on every patron who enters the casino also produced an extra $37.5 million, most of which goes to veterans services.
Missouri’s most profitable casino — Ameristar St. Charles — generated $67 million in tax and fee revenue alone last year, according to the gaming commission’s 2019 annual report.
Both the lottery and the casino industry say the gray machines threaten this revenue. If people opt to play the machines instead of spending money on the lottery or going to a casino, then state revenue will be diminished.
There’s some anecdotal evidence this is the case. In a few interviews earlier this month, people who play the gray machines said they like to play slots at the casino more than the machines, but that the gray machines were more convenient.
“I prefer the casino; I just don’t want to drive that far,” said Brian Wiley, who was playing a gray machine at a FastLane gas station near his house in O’Fallon.
The gray machine owners appear to be targeting businesses that already have lottery games. Lottery Director May Scheve Reardon said her employees started seeing the machines in 2018, when they went out to check on their vendors.
“All of a sudden it was like a lightbulb came on, and they were everywhere,” she said.
Reardon said the lottery saw an $800,000 dip in revenue in just one area of the state — along Interstate 44 from Rolla to St. James — in the last half of 2018, which she attributes in part to the arrival of the machines.
Yet the lottery’s business doesn’t seem to be hurting, overall. Its proceeds have increased by almost 50% over the last 10 years, and sales went from $1.4 billion in the 2017-18 budget cycle to $1.46 billion in the 2018-19 cycle.
The Missouri Gaming Association hasn’t tried to quantify the gray machines’ impact on business, said Mike Winter, executive director of the organization. State records show gambling tax revenue is down slightly from last year, but not significantly.
It’s also hard to tell if the gray machines might be cutting into growth in the lottery or casino markets, since very little is known about how big the gray machine market is.
Torch is one of the few companies to be publicly identified as operating the machines, though several people say they are other operators in the market. Since they aren’t regulated, it’s hard to get a handle on how many.
“We have been contacted by many operators that put machines in locations like this. There are several of them. Torch is not the only one by far,” Shaul said.
It’s also not clear how many gray machines are operating in Missouri. Keller said Torch has hundreds of machines but didn’t give an exact number.
“We’ve heard numbers from, ‘There’s not many,’ to there’s 10,000 to 14,000 across the state. So because they’re not regulated, they’re not registered, and no one really knows,” Shaul said.
If there are as many as 14,000, it would be getting close to the number of slot machines in Missouri. There are 16,900 slot machines in the 13 casinos, Winter said.
Ramping up political pressure
Torch appears to be ramping up its political donations in anticipation of proposed regulations.
The company, its owner Steven Miltenberger and his family have made a total of $105,000 in political donations over the last two years. That includes $20,000 that has gone to a political action committee supporting Republican Gov. Mike Parson, who is up for election next year.
Torch has hired three high-profile lobbyists, including former Missouri House Speaker Steve Tilley, a close friend of Parson’s, and former Rep. Scott Dieckhaus, a sought-after campaign consultant in Republican circles. Keller, the company spokesman, is also a well-known Republican consultant.
Keller said the company plans to fight onerous regulation that might come Torch’s way and blamed state government workers for the focus on his company’s business.
“When they realized they weren’t taxing or regulating us, they decided we may be a good pot of money to go after,” he said.
Follow Julie O'Donoghue on Twitter: @jsodonoghue
Send questions and comments about this story to email@example.com