When Tax Law Needs to Know What Is a Slot Machine

Pennsylvania imposes a tax on slot machines equal to 34 percent of gross terminal revenue and a local share assessment. Businesses operating so-called skill devices have not been paying the tax because they claim that the devices are not gambling devices. The dispute between the Commonwealth of Pennsylvania and the operators reached the Supreme Court of Pennsylvania, in In Re: Three Pennsylvania Skill Amusement Devices et al; Appeal of Commonwealth of Pennsylvania.

The Court concluded that the skill devices are slot machines, subject to the tax (and also subject to criminal law provisions applicable to slot machines). It reasoned that the device meets the general definition of a slot machine in the Gaming Act. It pointed out that in 2017 the legislature added "skill slot machine" and "hybrid slot machine" to the definition of slot machine, and that the devices in question are "plainly either a 'skill slot machine' or a 'hybrid slot machine.'" The Court explained that, even setting aside the statutory language and "resorting instead to a judicial gloss," the device meets the "ordinary English definition, a 'coin-operated gambling machine that pays off according to the matching of symbols on wheels spun by a handle,' or an electronic version of such a device." Finally, even though some degree of skill is, or hypothetically can be, a component of playing the device, the 2017 legislation provides that no amount of skill removes the device form the ambit of a slot machine.

As I have pointed out in previous commentaries, the practice of tax law extends beyond reading, understanding, and interpreting tax statutes. It extends beyond computations. It very often involves defining terms that exist outside of the tax law. What is a gift? What is a scholarship? Who is a brother-in-law? What is a household? What is candy? The list is long. And that list includes, what is a slot machine?

I could easily wander into the world in which people debate whether something is gambling or the exercise of skill. It is easy to identify pure gambling: the roll of dice, the pushing of a button on a slot machine, the placing of a bet on how many points an NBA player will have with 22 minutes remaining in a game. These are instances in which the outcome is beyond the person's control. On the other hand, it is easy to identify pure skill: making a dress from a bolt of fabric, solving a sudoku or crossword puzzle, fixing a flat tire. Yet there are so many situations that are a blend of both: playing poker, where the drawn cards are beyond the player's control but the decision to draw more cards or to fold manifests the player's skill, placing a bet on the kicking a field goal in windy conditions with the wind beyond the kicker's control but the approach and leg swing within the player's control, placing a bet on whether a baseball will be hit well enough to be a homerun but facing the risk that the wind keeps it from leaving the park. The manufacturers of the devices in question tried to shift them out of the gambling category by adding a skill element. The Court described how this worked:

The legally relevant skill element comes into play whenever a spin in the base game produces a loss, or the player “wins” an amount less than the wager, specifically less than 105% of the amount wagered on a given spin. The player then is given the opportunity to use an additional feature called “Follow Me.” “Follow Me” is a memory test reminiscent of the game “Simon.” The player is presented with a three-by-three grid of colored dots, which flash in a random sequence that the player must recall and reproduce. The entire exercise consists of twenty-five rounds, with each round adding another step that the player must remember. By the end of “Follow Me,” the player must correctly reproduce a sequence of twenty-five steps. Upon successful completion of this task, the player receives 105% of the amount wagered in the base game. Thus, using the “Follow Me” feature, a successful player can avoid realizing a loss on any given play of the base game.

The Court pointed out that the "Follow Me" feature is "not mentioned or explained in the device’s general instructions, and the feature can be accessed only by clicking a cryptic and unexplained prompt—“Touch Here to Follow Me”—which appears for only a few seconds after a losing spin, and only after the option to play the base game returns." The Commonwealth argued that the device "discourages the use of the feature because 'Follow Me' is tedious and unreasonably difficult; deliberately slows gameplay by imposing multiple 'intermissions' between rounds where nothing happens for approximately fourteen seconds; takes approximately twelve minutes to complete in total, compared to mere seconds to play the base game; and awards only a few cents in excess of the player’s lost wager (at most twenty cents, on a maximum bet of four dollars). The Commonwealth also argued that "'Follow Me' is 'an obvious fig leaf, included to cloak the game’s primary purpose as a gambling device,'” and "that 'Follow Me' isn’t there for the players; it’s there for the lawyers.” The Court's conclusion that the devices are slot machines did not require it to evaluate whether the skill required to play "Follow Me" was genuine or a "fig leaf" because its conclusion would be the same no matter the degree or genuineness of the skill inherent in playing the device.

The Court suggested that if the operators of the devices did not like the outcome, they need to understand that the legislature created the definitions and only the legislature could change the definition so that the devices would not be taxed as slot machines or treated as slot machines for criminal law purposes. I'm willing to bet that the manufacturers and operators of these devices, along with the businesses who have them on their premises, will approach the legislature for some sort of relief. For them, it's a gamble worth taking.

Every Once in a While They Get the Wrongdoers: Tax Debt Relief Scammers Caught and Punished

In a press release issued the other day, the Federal Trade Commission announced that it and the State of Nevada have settled charges it brought against the operators of a tax debt relief scheme. Under the proposed order, the defenders will not only surrender more than $8 million in cash and surrender other assets but will also be banned from debt relief services, tax preparation services, telemarketing, and impersonation of individuals, governments or businesses.

According to an earlier press release, the defendants operated multiple companies through which they falsely claimed the could settle taxpayers' back taxes for "pennies on the dollar" or only a "fraction" of what the taxpayers owed. These claims often were made before the defendants and their companies analyzed a taxpayer's financial and tax situation. The FTC and the State of Nevada alleged that the defendants mailed deceptive and threating letters that impersonated federal, state, and local governments to solicit calls from the targets of the letters. When taxpayers called, operators answering the call on behalf of the defendants and their companies also made false claims about tax debt relief. Taxpayers were also reached by telemarketing calls made by the defendants or their companies. Taxpayers were told that they were being investigated by tax authorities such as the IRS or that their accounts had been "red flagged" by those authorities or marked as "high risk." When taxpayers agreed to pay for the services offered by the defendants and their companies, the defendants and their companies did little, if any, of what they promised, and rarely, if ever, obtained the promised results. When taxpayers dissatisfied with what was done (or not done) asked for refunds of what they paid they were ignored.

The FTC charged the defendants and their companies with impersonating the government including local, state, or federal tax authorities, making false promises that they could reduce consumers’ tax debt, and violating the FTC’s Telemarketing Sales Rule requirements by making misrepresentations in telemarketing calls. The FTC alleged that the conduct in question violated the FTC Act, Gramm-Leach-Bliley Act, the Telemarketing Sales Rule, and the Impersonation Rule. The State of Nevada alleged that ATS’s conduct also violated Nevada law. The FTC filed a complaint against the individual defendants and nine affiliated companies.

Under the proposed settlement, the individual defendants will be required to pay $77.7 million, the amount they took from taxpayers from February 2022 to 2025. Except for the approximately $8 million cash and other surrendered assets, the full judgment is suspended based on the defendants’ inability to pay. The full judgment will become due immediately if the defendants are found to have misrepresented their financial condition. The settlement becomes binding once approved by the court.

Tax debt relief scams are just one tiny portion of the many scams that afflict people every day. Scams ultimately are designed to move money and assets from gullible, careless, or inattentive victims to those who want to make a "quick buck" the easy way. If it's not a call by someone pretending to be the IRS or a state revenue department claiming that the person owes taxes and needs to pay, it's someone pretending to be a grandchild looking for a payment from a grandparent, or someone pretending to represent a health care provider trying to get a Medicare number in order to siphon funds from the federal government, or someone offering some service in an attempt to get identifying information in order to drain a bank account or open credit in the victim's name. For every wrongdoer identified and stopped by law enforcement, there are dozens who go uninvestigated, or unidentified, or unpunished. Would these scammers not be better targets for the use of law enforcement resources rather than somw of what is currently being targeted?