It turns out that Virginia’s so-called “gray machines” haven’t impacted the sales from the commonwealth’s official lottery.
Gray machines earned their name because they had operated in a gray area of Virginia law. They look and operate similar to modern slot machines. However, the games usually combine some aspect of chance with a questionable “skill” aspect. It’s all an effort to skirt VA’s anti-gambling laws.
Before the COVID-19 pandemic hit earlier this year, more than 15,000 unregulated gaming devices had popped up across Virginia. They’re often installed in restaurants, bars, convenience stores, and other small businesses. Store owners usually get a cut of the profits.
Prior to the start of the year, Virginia lawmakers could no longer ignore the “skills games,” as the industry calls them. The legislators worried that the gray machines were cutting into Virginia Lottery revenue, which supports K-12 education.
As a result, the most likely outcome appeared to be lawmakers outright banning them.
However, when Virginia Lottery sales were expected to decline as the coronavirus pandemic began to set in, Virginia Gov. Ralph Northam offered a reprieve for gray-machine owners and operators earlier this year. As part of the final bill, the games can operate legally for one year.
Additionally, they are now taxed a flat rate of $1,200 per machine (or $1,200 per seat on multiplayer machines) during the reprieve, which is now set to end on July 1, 2021. They would also have to be moved only to establishments that the Virginia Alcoholic Beverage Control Authority licenses.
Northam had initially said the plan could generate $150 million for COVID-19 relief. It would also help pick up the slack from lost sales tax and lotto revenue.
I'm proposing a tax on electronic skill games that would generate more than $150 million a year for the new fund. I urge Virginia legislators to approve this plan when they return to Richmond on April 22 so we can get Virginians the aid they need to weather this crisis.
— Ralph Northam (@GovernorVA) April 12, 2020
However, the projections failed to account for one surprise: Virginia Lottery sales proved rather pandemic-proof.
Gray machine revenue falls short
During Wednesday’s Virginia House Appropriations Committee meeting, Northam unveiled his proposed amendments to the two-year budget, which was the result of a better-than-expected economy in VA during the pandemic. It resulted in an estimated $1.2 billion in additional revenue over the two years, most of which would be spent when the new fiscal year begins in July 2021.
The Democrat-controlled General Assembly will meet beginning Jan. 13 and consider the Democratic governor’s proposals to the revised budget. The new budget would include increased spending on COVID-19 response, education, social issues, state pensions, marijuana legalization, expanded rail service and broadband access, and bolstering the commonwealth’s emergency cash reserves, among other priorities.
Dan Timberlake, the director of the Virginia Department of Planning and Budget, then presented a breakdown of the proposed budget. While discussing direct aid to public education, he gave an update on the gray machines and lottery sales.
Timberlake said the gray machines are expected to generate approximately $94 million in revenue. That’s short of a revised estimate that ultimately projected $120 million. Delegate Chris Hurst then asked why.
“One reason we believe the gray-machine revenue is not what was originally forecasted is because people weren’t going into the stores (to play them). But what they were doing to our surprise is that they were buying lottery tickets,” Timberlake said. “The lottery is not seeing the loss of revenue from the fact that the gray machines are still out there.”
Don’t expect gray machines to stick around
In fact, due in part to new online and in-person play options, the VA Lottery has rebounded strongly from an initial COVID-prompted dip in sales.
Despite the lower-than-expected gray-machine tax revenue, Virginia’s budget shouldn’t be affected. Part of Northam’s revised budget accounts for the better-than-expected numbers, as the Virginia economy fared far better than other US states during the pandemic.
Representatives from gray-machine operators and manufacturers such as Queen of Virginia, Gracie Technologies and Banilla Games have argued that Virginia has room for all gambling, including “skill” options. In addition to the lottery, the state offers legal historical horse racing (HHR) via its Rosie’s Gaming Emporiums. Additionally, Virginia sports betting apps will be online and taking wagers as early as next month, and the first major Virginia casino-resorts will begin opening in four Virginia cities in 2022 and 2023.
However, even with early numbers showing that the gray machines don’t seem to be affecting lotto sales, many VA lawmakers still expect the ban to go into effect in 2021.
Still, so far during their initial stint as legal operators, the gray machines proved their popularity. But as Virginia state finance director Aubrey Layne told the committee on Wednesday, the industry faced obvious challenges.
“Many of those locations, as you know, were closed for a while – for the gray machines. They were in establishments, bars and stuff, that were shut down. And they were able to move them. But, of course, a lot of that hit during the pandemic. And that’s been the reduction in the gray machine monies.”