Legalized video gaming offers one of the fastest growing forms of entertainment available to people today, as states find that it offers a source of income without raising taxes for the average person.

Entrepreneurs in the nine states who already offer what has come to be called the “convenience game” are already reaping big profits.

Paul Jenson of Taft Stettinius and Hollister LLP describes the future of video gaming, along with 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 insight into the growth, challenges and opportunities of “non-destination” gaming at the recent Amusement Expo International in Las Vegas.

While sports betting has garnered a lot of media attention over the past two years, Jenson said opportunities in video games are more imminent for existing music and gaming operators, as well as establishments that they serve.

“It will be available within the next five years if it hasn’t already,” Jenson said. “The consumer preference for this type of game is clear.

“Never before have we seen more potential for growth, more discussion in the state legislature than we see today,” he said.

What is “convenience play”?

Proximity games, also known as “slot roads”, “road-based games”, “distributed games”, and “restricted games”, serve places where customers congregate for other reasons than gambling, such as restaurants, bars and truck stops.

“These are low-stakes types of games,” Jenson said. “They are not intended to directly compete with a casino environment.” First win payouts range from $500 to $1,199.

Most states that have yet to adopt legalized gambling look to Illinois as an example, Jenson said. Other states that have legalized video games include Pennsylvania, West Virginia, Louisiana, South Dakota, Montana, Oregon and Nevada, while Georgia offers a form of video game consisting of slot machines with cash payouts.

Machines vary in number from three to 50 per slot, but slots typically have between five and 10 games.

Some states license video games to establishments with liquor licenses, while Illinois and Pennsylvania also license them to truck stops.

Illinois advances

Illinois played a leadership role in neighborhood games as it sought to find new revenue streams during the 2009 recession.

The Illinois Coin Operators Association approached the legislature and said it was a good time to legalize video game terminals in bars and restaurants and suggested state licensing and tax gaming machines.

There were about 50,000 “grey” games in operation in the state at the time, Jenson said, and the state was not aggressively enforcing the law. Illegal games were not taxed and offered no consumer protection.

“It allowed us to get rid of the 50,000 gray games that existed,” Jenson said of the Illinois law that went into effect in October 2012.

Under Illinois law, game manufacturers cannot operate games and operators and establishments must be separated. The operator cannot offer anything of value in exchange for a contract to place “VGT” in the establishment.

Players cash in and obtain a redeemed ticket at a redemption terminal.

“We removed the bar, the establishment, completely from the checkout process for the most part,” Jenson said.

Minors are not allowed to play.

Local governments are required to pass ordinances to participate in video games.

Operators have placed video game terminals in bars, restaurants, fraternal organizations and licensed veterans. They also put them in truck stops that don’t need liquor licenses. The game’s hours of operation were tied to the liquor license and 24/7 at truck stops.

“As you can imagine, truck stops have become incredibly valuable locations in the marketplace,” Jenson said.

A three-way income split

The tax rate was initially 30% and the operator and the establishment shared the rest. The operator cannot offer the establishment a better distribution.

The maximum bet was set at $2 and the maximum jackpot was $500.

In some states, any felony conviction excludes a license. In other cases, if the conviction dates back more than 10 years, the gaming commission has discretion in this regard. Gambling convictions also preclude a license, while crimes of moral turpitude in the past 10 years were a disqualification in some states.

“The gaming regulator has tremendous discretion over almost every decision that happens with who is allowed to participate within their individual market,” Jenson said.

From 2012 to 2019, the industry saw steady growth and acceleration in 2019.

The Illinois tax increased in two stages to 34%. In exchange, each slot was allowed a sixth VGT while truck stops were allowed to have 10. The maximum bet was increased from $2 to $4 and the maximum jackpot from $500 to $1,199.

Today, there are 7,910 licensed facilities in Illinois operating 42,500 VGTs. This does not include the city of Chicago which has not yet registered.

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 which generated $548 million in taxes. In 2019, there was nearly $3 billion in gambling revenue (for 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’ve seen this money flow all over the state to places that have never seen gambling tax revenue before,” Jenson said, noting that local communities don’t derive revenue from casinos.

In Pennsylvania, Michigan and New Jersey, combined tax revenue was just over $644 million in 2021.

As the convenience gaming market grew, casino companies bought up entertainment companies, Jenson said. Meanwhile, private equity firms and hedge funds that have purchased casinos over the past 20 years have recognized this new form of gambling.

However, state adoption does not happen quickly.

“Gambling legislation is incredibly difficult to pass,” he said. “That’s why you see these things taking a while.”

Photo: Networld Media Group.