|Action||Promulgation of Charitable Gaming Regulations by Department of Agriculture and Consumer Services, including electronic gaming provisions|
|Comment Period||Ends 11/23/2022|
Below, please find Grover Gaming's comments to the proposed charitable gaming regulations. A formal letter will be submitted to Mr. Menefee directly under separate cover.
RE: Grover Gaming Comments to Proposed Charitable Gaming Regulations (11 VAC 20-20-12)
On behalf of Grover Gaming, I am grateful to submit these comments on changes to regulations governing charitable gaming at 11 VAC 20-20. We appreciate the challenge facing the Office of Charitable and Regulatory Programs (OCRP) given the sweeping changes contained in the enabling statute and the added enforcement burden connected with the issuance of hundreds of new permits. We believe that OCRP has done a good job overall capturing the intent of the legislation and commend them for their work.
We offer these comments as means to improve the newly constructed regulatory framework for the operation of electronic pull tab machines in social quarters.
The Virginia General Assembly has mandated that any regulation have an Economic Review Form completed jointly by the regulating agency and the Department of Planning and Budget. OCRP submitted the requisite Economic Review Form with the publication of the charitable gaming regulations to the Virginia Register of Regulations. However, the document fails to present a full analysis of the impact the regulations will have on the industry being regulated.
Paragraph 2 of the previously cited statute requires the agency to provide an analysis of:
(i) an identification and estimate of the number of small businesses subject to the regulation; (ii) the projected reporting, recordkeeping, and other administrative costs required for small businesses to comply with the regulation, including the type of professional skills necessary for preparing required reports and other documents; (iii) a statement of the probable effect of the regulation on affected small businesses; and (iv) a description of any less intrusive or less costly alternative methods of achieving the purpose of the regulation.
It is our assertion that OCRP unintentionally failed to comply with these requirements in the Economic Review Form through errors of omission.
In Table 4 of its Economic Review Form OCRP incorrectly states that “[t]his regulation establishes requirements for charitable organizations, which are non-profit entities, not businesses.” To the contrary, the organizations permitted to conduct electronic gaming are “social organizations” classified as tax exempt under sections 501(c)(8), 501(c)(10), and 501(c)(19) of the Internal Revenue Code and educational institutions licensed or certified by the State Council on Higher Education and classified as tax exempt under 501(c)(3).
Any organization seeking to conduct business in Virginia must register and file articles of incorporation with the State Corporation Commission (SCC). Those organizations seeking federal and state tax-exempt status are covered by the Virginia Non-Stock Corporations Act. Failure to properly file with the SCC is a class 1 misdemeanor. Tax-exempt businesses function like any other business with the one exception that there is no owner earning a profit from the business activity.
Further, for the purposes of the Economic Review Form, a small business is defined as a business employing fewer than 500 employees with revenue less than $6 million. Most, if not all, of the social organizations covered by this regulation should be classified as small businesses and are entitled to an assessment by OCRP and DBP of the impact of these regulations. Failure to complete Table 4 of the Economic Review Form deprives the regulated small businesses the due process afforded to them on §2.2-4007 the Administrative Process Act.
In Table 1(c) of the Economic Review Form, OCRP states, “[t]he Charitable Gaming Law requires VDACS to set a percentage of adjusted gross receipts so there is no alternative to prescribing the percentage in the regulations.” This statement is partially correct in that the Charitable Gaming Law adopted by the General Assembly and signed by the Governor in 2022. However, the code section is prescriptive in function but not form.
The law simply states that the regulations shall include a “predetermined percentage of its receipts” to be used for the charitable purposes or capital expenditures. It does not require that a definitive number appear in the regulation. OCRP has very narrowly interpreted the word “predetermined” to mean written in regulation. However, OCRP has the latitude under the statute establish a process to evaluate and adjust the “predetermined percentage” on a semi-regular basis provided that the percentage is set and communicated to the qualified organizations prior to the expenditure of funds.
In other words, OCRP could have developed some regime whereby the predetermined percentage is judged based on whether organizations generally could comply with the set percentage. If OCRP found that compliance was declining it could adjust the rate down without the added burden of conducting a full regulatory process to change the number. In this instance, “predetermined” would be interpreted to mean conveyed to the regulated industry prior to the compliance period. Adopting this approach would be more beneficial to both the regulated industry and the regulating body because it allows rapid reaction to fluctuations in market conditions and the ability to quickly address behaviors within the industry.
The code is clear on the remedies incumbent upon an agency in the instance that public comment identifies errors in the economic impact analysis. OCRP should revise and reissue the economic impact analysis as directed by code, which we believe will reveal a significant impact of the regulations on small businesses regulated by OCRP. Given the anticipated significant impact on small businesses, OCRP must notify the Joint Commission on Administrative Rules and the money committees of the Virginia General Assembly.
As a manufacturer of electronic gaming devices, Grover Gaming believes that its business could be impacted both directly and indirectly through its customers. Some customers have already indicated that the new requirements will cause them to consider abandoning charitable electronic gaming and potentially dissolve their organizations. While some of these reactions might be unnecessarily catastrophizing the unknown impact of the new regulations, there is certainly room for some changes that will reduce the impact on the entire charitable gaming industry.
As drafted, the new Charitable Gaming Regulations set the use of proceeds at 40% of the adjusted gross receipts from electronic gaming devices. Prior to the enactment of the new Charitable Gaming Law, the charitable proceeds from electronic gaming were mostly not required to be reported and were not subject to any use of proceeds requirements. Every charitable organization strives to spend as much of their total receipts as possible on its mission. However, there are costs associated with raising money for an organization including costs associated with charitable electronic gaming. While 40% may seem like a reasonably low bar for use of proceeds, as written, this amount would account for as much as 80% or more of the receipts actually retained by the social organization after costs.
The new Charitable Gaming Laws require a separate space for electronic gaming machines with controlled access and the presence of a gaming manager during gaming sessions. Additionally, some services offered in social quarters might not be available during times when gaming is unavailable. This means that a significant portion of the expenses incurred by a social organization (e.g., salaries, utilities, rent/mortgage, cleaning) can be attributed to their fundraising efforts via electronic charitable gaming. The statute prohibits the use of charitable gaming funds for general expenses unrelated to gaming, and the burden will be on the social organization to prove that these expenses are attributable to gaming. Even so, with the existence and mission of many of these organizations dependent upon funds from charitable gaming the small amount retained for gaming related expenses will likely not cover the cost of fundraising through gaming.
Alternatively, OCRP can set a lower percentage for use of proceeds. It is difficult to determine the exact percentage that would be sustainable, and it is likely to be different from organization to organization. Setting a percentage between 20% and 30% would result in social organizations spending 40% to 60% of their retained receipts on the charitable functions for which they are organized. OCRP might also consider the framework discussed in Section I(b) of this letter whereby they define a process for predetermining the use of proceeds percentage that allows them to make adjustments based on organizations’ ability to comply.
Another option would be to create a graduated scale for use of proceeds similar to the taxation schedule for casinos adopted by the General Assembly. While the revenue triggers in the casino taxation law are beyond what any social organization could hope to fundraise, a graduated use of proceeds scale based on revenue could be a more equitable approach. Smaller organizations with less gaming fundraising income would have a greater percentage of resources available to cover their gaming expenses. Larger organization would have the benefit of larger receipts to help support their fundraising efforts.
In addition to the problems with setting the use of proceeds percentage to 40%, OCRP has removed the provision allowing the use of proceeds to include capital costs for real property used in the execution of an organization’s mission. For many social organizations electronic gaming receipts have been the primary funding source for property and buildings used in pursuit of their mission. The statute explicitly provides for this allowance and the exact wording in the code is reflected in the existing charitable gaming regulations. We would encourage OCRP to include this provision in the regulations as well.
OCRP has built-in multiple touch points to ensure that inspectors, auditors, and law enforcement can quickly identify electronic pull tab machines in social quarters that are legally present and usable. The individual placement of decals by OCRP officials is a clear indication of a machine’s approved use. The absence of a decal is an indicator of an unauthorized machine.
The statute allows OCRP “to authorize a maximum of 18 electronic gaming devices” at any one location. The statute does not require the authorization of electronic gaming devices on a charitable gaming permit to prescribe the number of devices allowed at any location, and it is unnecessary to have that requirement in the regulation. Preemptively limiting the number of devices could prevent an organization from seeking to expand its operations and it would create more work for OCRP is reissuing authorizations and permits in the event an organization does expand.
OCRP retains the right to refuse to certify a gaming device for a location. Denying a permanent decal for an electronic gaming device would prevent its use and satisfy the provision of the statute that OCRP may authorize devices up to 18 at any one location. We ask that OCRP strike from the regulation that the number of allowable electronic gaming devices appear on the charitable gaming permit.
Because social organizations do not own the electronic gaming devices that they use for fundraising, manufacturers will often repair and replace machines quickly when there are issues or when new features are available and approved by OCRP. In an effort to improve efficiency and reduce the administrative burden on OCRP, we propose a system of temporary approval that is comparable to 30-day temporary registration tags that car dealerships provide upon purchase.
Manufacturers are required in the statute to immediately notify OCRP when a machine is moved or replaced. With limited resources, field inspectors could become quickly overwhelmed trying to keep up with inspections and decal issuance. The result would be lost fundraising time for the social organization. Allowing a manufacturer to temporarily self-certify a machine whose software and hardware are in keeping with the systems already approved by OCRP will give field inspectors more time to keep up with certifying new machines. The decals should include all of the same information as a permanent decal with the addition of an expiration date that is clearly legible. Manufacturers would be required to account for all temporary decals in their possession.
Social organizations are required to deposit receipts from electronic device gaming session within two days of the conclusion of that gaming session. Social organizations who plan to have daily gaming sessions would be required to make bank deposits on a daily basis. It may be unrealistic to expect an organization run by volunteers to make daily deposits. Proper quality controls for a volunteer organization should call for a cash reconciliation by more than one person. It is possible that those quality controls could not be met with daily bank deposits. We would recommend OCRP change the bank deposit frequency to weekly rather than every two days.
Grover Gaming has been one of the vocal businesses calling for increased regulation of the charitable gaming industry. We supported the passage of the enabling legislation for these regulations, and we support the overall goal of these regulations. We appreciate the opportunity to comment on these regulations and hope OCRP finds our comments helpful.
Grover Gaming is excited to continue as a manufacturer of electronic gaming devices in Virginia. OCRP has and continues to lead other states as charitable gaming regulators. Please feel free to contact us regarding any questions about our comments.
Chief Counsel & Director of Complian