Taxing skill games could help fund SEPTA. Here’s what to know.

Could slot machine-style games help save SEPTA?

That’s a key question in Harrisburg as Gov. Josh Shapiro and state lawmakers try to hammer out a budget deal that includes funding for the beleaguered public transit system.

Taxing and regulating so-called skill games — tens of thousands of which have been installed in convenience stores, bars, and other locations across Pennsylvania over the past decade — has emerged as a potential new revenue stream.

The biggest player in the skill games market, Pace-O-Matic, has spent millions of dollars in recent years funding politicians’ campaigns and lobbying lawmakers as it seeks favorable regulation and tax rates lower than what casinos and games of chance pay.

More recently, Pace-O-Matic has been at the center of political drama in the state Capitol. The company has publicly accused Senate GOP leaders of pressuring Pace-O-Matic’s lobbyists to drop it as a client.

A spokesperson for Senate President Pro Tempore Kim Ward (R., Westmoreland) called the claim “bizarre” and “embarrassing,” and Ward herself lashed out at skill games backers for “bullying” legislators, though she didn’t single out any company by name.

» READ MORE: As Pa. gets closer to regulating skill games, these lawmakers say they’re being subjected to an intimidation campaign

For its part, Pace-O-Matic says it has faced a concerted effort by casino interests and their lobbyists — and even its own former lawyers — to ban its products.

Law enforcement has also been scrutinizing the industry. A former top Pace-O-Matic compliance officer — a retired Pennsylvania State Police corporal — has been charged with racketeering and other offenses amid a state grand jury probe into illegal gambling.

The company hasn’t been accused of wrongdoing in that case.

“Pace-O-Matic’s legal Pennsylvania skill games generate supplemental income for thousands of small businesses and fraternal organizations across Pennsylvania,” the company said in a statement. “Over the last 10 years, these establishments have come to rely on that income as they budget against ever-rising costs, labor shortages, and a challenging economy.”

Here’s what to know about Pace-O-Matic and the games at the center of the debate.

Based in Duluth, Ga., Pace-O-Matic was founded in 2000 by Michael Pace. The software company develops, produces, and licenses electronic games in more than a half-dozen states, including at least one that has tried to outlaw the games.

Virginia lawmakers banned skill games in 2020. But Pace-O-Matic has continued to do business there, changing its Queen of Virginia game so that instead of inserting money into a machine, players pay a store cashier, who then unlocks the device.

After state authorities charged a store owner with having an illegal gambling device, a judge in April ruled that the new game complied with the law because it didn’t require players to insert a coin or token, according to the Richmond Times-Dispatch.

Philadelphia lawmakers enacted a ban on skill games in 2023, saying they attract crime, but a court last year halted its enforcement pending an appeal by a distributor and store owner.

City officials have raised concerns that the machines are concentrated in vulnerable communities and that in some stores — so-called mini-casinos — the games are the main products.

Pace-O-Matic says its games are not located in mini-casinos and that it opposes such establishments.

Pennsylvania legalized casino gambling at horse racing tracks in 2004 and set up the state Gaming Control Board to regulate them, seeing an opportunity to generate new tax revenue. Since then lawmakers have further expanded gaming, including by authorizing mini-casinos away from racetracks and online gambling.

But outside these regulated establishments, gambling is still illegal. The Pennsylvania Crimes Code says a person is guilty of a first-degree misdemeanor if he knowingly makes or sells a punch board, drawing card, slot machine, “or any device to be used for gambling purposes, except playing cards.”

State law enforcement authorities have said Pace-O-Matic’s Pennsylvania Skill games constitute such gambling devices. But the company gained momentum in the Keystone State in 2014 when a state judge found that law enforcement agents had improperly seized the company’s devices from the American-Italian Club in Aliquippa, Beaver County.

A key question before the court was whether the games featured on the coin-operated machines — including a tic-tac-toe puzzle — were determined primarily by skill or chance, with the latter constituting gambling. In a game of chance, the outcome is decided predominantly “on the basis of probability rather than any real input of skill,” Common Pleas Court Judge Harry E. Knafelc wrote, citing case law.

“Because of the level of interactivity between the game and the player, as well as the gameplay mechanics, the evidence fails to show that the games included on the device … are anything other than games of skill,” Knafelc wrote in his opinion.

That was a win for the industry, but the Pennsylvania Attorney General’s Office has continued to argue that the games are illegal. The AG’s office told a state appeals court in 2023 that Pace-O-Matic’s games were slot machines prohibited under the law.

The Commonwealth Court disagreed, finding that while the first stage in gameplay “may be analogous to the experience that a slot machine offers,” the Pace-O-Matic machines also feature a memory game that distinguishes them from casino-style slots.

Pennsylvania’s Supreme Court last year agreed to consider an appeal from the state in the case, which involves a Dauphin County bar and an amusement device vendor. Although the litigation involves Pace-O-Matic’s games, the company isn’t a party to the case.

Like many industries that face potential government regulation, skill game operators have sought to curry favor with elected officials in Harrisburg.

Operators for Skill PAC, a group affiliated with Pace-O-Matic, disclosed $2.5 million in political expenditures from 2019 through 2024, according to Pennsylvania campaign finance records.

The biggest recipients in 2023-24 were the state House and Senate Republican campaign committees, according to data compiled by Spotlight PA, though Democratic leaders including Shapiro and House Majority Leader Matt Bradford (D., Montgomery) also received campaign donations.

Pace-O-Matic spent $7.6 million on lobbying over the same time period, records show.

Yet it has run into some resistance in Harrisburg, including from gaming interests such as casinos, the state lottery, and video game terminal operators. Gaming revenues across slot machines, table games, sports wagering, online gambling, and other regulated games totaled a record of more than $6 billion in 2024, according to state data.

But casinos and others say they are losing revenue to the untaxed skill games — and in recent years they have moved to protect their business from the competition.

Lobbyists and lawyers for Parx Casino privately drafted legislation, sponsored by then-State Sen. Tommy Tomlinson (R., Bucks), that would have banned skill games. They also met privately with members of the Gaming Control Board in January 2020, weeks before the regulator joined the legal fight to ban skill games, Spotlight PA reported.

Those episodes were later revealed in litigation after Pace-O-Matic in 2020 sued its former law firm, Eckert Seamans Cherin & Mellott, alleging that the firm failed to disclose a conflict of interest and breached its contract.

Pace-O-Matic says that even as it hired Eckert to promote its business in Virginia, the firm advocated against the skill game company’s interests in Pennsylvania. The litigation is ongoing.

Eckert has denied wrongdoing in court papers and said it had advised Pace-O-Matic of the firm’s representation of gaming clients in Pennsylvania.

Pace-O-Matic says that it wants to be regulated and that its games should be taxed at lower rates than casino slot machines, which are levied at roughly 54%.

Shapiro has proposed taxing skill games at 52%, which he estimates would generate at least $369 million in new revenue.

Legislative proposals include tax rates ranging from 16%, backed by the industry, to 35% — a rate that Pace-O-Matic says could effectively climb to 40% or more based on a “regulatory assessment” included in the bill.

That plan would “harm small businesses, American Legions, volunteer fire companies, and other organizations,” the company said.

Lawmakers are also weighing which agency should regulate skill games, what kinds of businesses should be able to offer them, and limiting the number of terminals per establishment.

For example, a bill sponsored by Sen. Chris Gebhard (R., Lebanon) and Senate GOP leaders would authorize a limited number of machines at businesses that have a liquor license or participate in the state lottery.

Gebhard wrote in a memo to colleagues that without regulation, the state “cannot determine the number of machines that are operating across Pennsylvania, whether appropriate taxes are being remitted, and whether the payouts offered by these machines are fair to the player.”

He added that the devices “lack any enforceable age restriction and have no safeguards to prevent or address problem gaming issues.”

Even as lawmakers have weighed whether and how to regulate skill games, purveyors of illegal video gambling devices — games of chance that lack a memory component — have found a robust market for their products, authorities say.

Illegal gambling enterprises have sought to commingle their machines with Pace-O-Matic’s legal games in convenience stores to lend their products a veneer of legitimacy, according to an October 2024 state grand jury presentment.

They allegedly found an ally in Ricky Goodling, a retired state trooper who until recently was Pace-O-Matic’s national director of compliance. The Pennsylvania Attorney General’s Office charged Goodling in December with racketeering and other offenses, accusing him of accepting hundreds of thousands of dollars in kickbacks from the gambling organizations in exchange for quashing complaints from those businesses’ competitors.

Pace-O-Matic has said Goodling resigned in late 2023 after the company learned of a federal probe into his tax filings. The Internal Revenue Service seized more than $400,000 from his accounts around that time, the Pennsylvania Capital-Star reported.

The company has said it has cooperated with authorities. Goodling’s attorney didn’t respond to a request for comment.

Staff writer Gillian McGoldrick contributed to this article.