|Action||Promulgation of Charitable Gaming Regulations by Department of Agriculture and Consumer Services, including electronic gaming provisions|
|Comment Period||Ends 11/23/2022|
Virginia Department of Agriculture and Consumer Services proposed Charitable Gaming Regulations -Title 11 Chapter 20
Public comments Offered by the Virginia Charitable Gaming Council (VCGC)
?The Virginia Charitable Gaming Council, Inc. (the “VCGC”) is a Virginia non-stock corporation comprised of nearly 200 separate organizations around the Commonwealth of Virginia with an interest in charitable endeavors. The Council consists of such independent 501(c)(3)(7)(8)and(10)organizations such as the Fraternal Order of Police, the Veterans of Foreign Wars, the Elks Lodge, the Moose Lodge, and other charitable and fraternal organizations. We appreciate the opportunity to offer written comment on the new proposed regulations that will have a significant impact on charities around the Commonwealth. These comments are offered in furtherance of oral public comment offered by the VCGC on November 15, 2022. These comments are offered in my capacity as an attorney, and not a lobbyist pursuant to the definitions contained in 2.2–419 of the Code of Virginia.
?Charitable gaming was first authorized in Virginia in 1973, the first form of gambling permitted by law. The lottery began in 1988 followed by other types of authorized gaming in recent years. All of the members of the VCGC, and all of the permitted and licensed charitable gaming organizations, have been approved for federal tax-exempt status by the Internal Revenue Service. They are all duty-bound by federal and state law to operate in a fiduciary manner to implement the charitable purposes for which they were approved. Those that don’t are subject to loss of their federal tax exemption.
?Over the years these relatively small independent charities have operated very well, contributing hundreds of millions of dollars to benevolent purposes. There has intermittently been the occasional operator who has not followed the regulations and brought additional government scrutiny on the operations. The Commonwealth began to regulate charitable gaming in 1995 in the wake of one series of bad conduct. Other individual actors moved legislators to significantly reform the statutes in 2022.
?The 2022 statutory reforms direct substantial new public oversight of charitable gaming; and for the first time, a vast amount of charitable gaming activities occurring in social quarters by organization members will now be required to be publicly regulated along with new reporting and recordkeeping requirements. The new statutes combined with these proposed regulations impose multiple new obligations on charities, including a combined 0.75% of revenue audit fee, maintenance of new bank accounts, a new electronic gaming permit fee, vast new regulations by the Department of Agriculture and Consumer Services (the “Department” or “VDACS”) as opposed to the Charitable Gaming Board of peer members, and other obligations.
?At the same time these charitable operations are also faced with significant, new, well-funded competition for gaming dollars as a result of the General Assembly authorizing five new casinos beginning in 2023, the legalization of sports betting, and the continuation of skill games. While charitable gaming is organically conducted by Virginia citizens at Virginia locations resulting in near complete charitable expenditures for Virginians, a significant amount of revenue from these other gaming operations will flow out of the state.
?It is against this backdrop that we implore the Department, where it has been granted discretionary authority over this industry, to implement new regulations with a velvet hand to allow these charities to continue to operate, flourish, and do good work. There are ample new restrictions and reporting requirements included herein to assure the General Assembly that it’s intent to properly police, sanction, and remove any bad actors has been accomplished. Since the majority of the industry has never been regulated, VDACS possesses little objective data about the actual volume of charitable gaming activity, the direct and indirect expenses of conducting charitable gaming and facilities, and the potential impact of new regulations on the ability of charities to survive and continue their charitable missions.
We asked the following key issues be evaluated and modified:
1. Virginia Code Section 18.2–340.16 states that “salaries and wages of employees whose primary responsibility is to provide services for the principal benefit of an organization’s members may qualify as a business expense.” However the proposed regulation appears to ignore the word MAY and categorically determines that such salaries and wages shall not be considered reasonable and proper business expenses. Interestingly the legislative history shows the legislature expressly changed the language from shall not to MAY. It would therefore be imprudent for the Department to categorically exclude such expenses in regulations which are specifically, potentially includable by statute rather than a more permissive regulation honoring the intent of the Legislature. The Department should craft a reasonable business like test for including such expenses in the calculations required
2. Proposed regulation 11 VAC 20–20–20 pertaining to permit eligibility and requirements, and the use of proceeds, is especially problematic.
?Sections D(1) and (2) outline requirements for a minimum use of proceeds for charitable purposes for a permittee to maintain its permit. While this is a laudable goal, thenproposed percentages are both unrealistic and unworkable, according to VCGC members with long histories in the industry. Industry members indicate that approximately 90 to 95% of electronic gaming gross receipts are returned to winners, and approximately 85 to 90% of bingo/paper gross receipts are returned to winners. Out of the remaining receipts, operators must pay certain hard business expenses before making contributions to their own charities as well as other charitable entities.
The proposed regulations set the minimum percentages as follows:
For other than electronic gaming, 10% of gross receipts;
For electronic gaming, 40% of adjusted gross receipts;
Members indicate that these percentages, particularly those for electronic gaming, are unrealistically high in light of increased winner payouts over the years needed to remain competitive with other gaming venues, and increasing expenses for rent and other reasonable and proper business expenses (inflation, etc).
The VCGC recommends the following realistic percentages:
For other than electronic gaming, 2% of gross receipts;
For electronic gaming, 20% of adjusted gross receipts.
Until the Department gets a few years of actual reports and data from the members, it will not be able to accurately ascertain the legitimate expenses for personnel, rent or mortgage, and other material expenses actually incurred. The lofty, but arbitrary, goals in the proposed regulations, potentially set charities up to fail and lose their licenses. It cannot be overstated from members of the VCGC how important it is to set realistic use of proceeds targets so these relatively small charities made up of law enforcement, veterans, and fraternal associations can survive, succeed and generously contribute as they have for nearly 50 years.
3. Continuing focus on Section 11 VAC 20– 20–20, the regulatory mandate to suspend or revoke an organization that does not meet the use of proceeds percentages, is unusually harsh. For non-electronic gaming, Subsection E does require the Department to permit an organization to implement a remedial plan, and cannot revoke or suspend solely based on the use of proceeds failure. However, under Subsection H, if the failure is based on the use of proceeds for electronic gaming, mandatory suspension or revocation is required, with no opportunity for crafting and executing a remedial plan. Given the newness of electronic gaming reporting and the regulation of activity previously unregulated within the social quarters, this seems unreasonable. It is especially harsh since an organization cannot reapply for a year following revocation, making continued existence improbable. Providing an opportunity for remediation while operating, or suspension with a remedial plan, appears fair to the charities struggling to provide maximum competitive payouts and control rising expenses. In addition, the proposed regulation appears to be in contravention to §18.2-340.20B.
The regulations should also make clear that expenses related to the acquisition, construction, maintenance, or repair of any interest in real property involved in the operation of the organization, and rent or related expenditures which are clearly appropriate deductible business expenses are a valid “use of proceeds”.
4. Proposed regulation 11 VAC 20–20–80 creates requirements for a new bank account. Each organization will naturally have its own business operating account. Subsection A requires every qualified organization to maintain a “charitable gaming bank account” separate from any other account. Now, subsection F requires any organization performing electronic gaming to maintain a separate bank account for all receipts from electronic gaming.
There are several concerns:
First, with technology, rather than requiring multiple separate bank accounts, it should be permitted that receipts from electronic and non-electronic be recorded separately in reports, which will have to be generated for the Department. These reports can clearly code and separate non-electronic versus electronic gaming revenue for the application of audit fees, use of proceeds calculations, and other regulatory matters for which there are separate calculations based on the type of gaming.
Second, while charitable gaming bank account records have a three-year maintenance requirement pursuant to Subsection C, there is no clear record retention policy in the proposed regulations for such electronic gaming account. Perhaps three years would also be appropriate. Additionally, it is unclear in the proposed regulations how the electronic gaming account can be used, and how disbursements from that account can be made.
Finally, the Department should also review the timing of the deposits and reports imposed upon such organizations as they appear more immediate than may be necessary.
5. Given the potential to rent out venues to other permitted organizations, there is the potential for a significant number of reports due under proposed regulation 11 VAC 20-20-90. Perhaps there can be an option to instead give access to the gaming machines portal itself so that VDACS is able to pull whatever information it needs directly from the portal. Such an option could dramatically reduce the reporting burden on charities, cut down on potential errors, and simultaneously improve VDACS’ oversight.
6. The regulations should also be more clear as to what kinds of leases, contracts and agreements related to electronic gaming need to be submitted and approved by the Department in advance, as well as provide more guidance on the criteria for what is and is not allowed within those leases, contracts and agreements.
7. Proposed regulation 11 VAC 20-20-100 establishes the maximum audit and administration fee permitted by law without a clear establishment of the need for the fees to be set at that level. A key distinction between a “fee” and a “tax” is the use of the proceeds. A fee is imposed for the purpose of recouping the costs incurred in providing the service for which the fee is charged, whereas a taxed is used to raise revenue. It is not clear that a proper study has been done to determine how much of a fee is needed to recoup the costs of administering the charitable gaming regulations. Therefore, setting the fee at the maximum permitted level leaves nowhere for the Department to go. Will there be a mechanism in place for refunding excess fees collected?
Additionally, there is concern regarding the interplay between the organizations conducting the charitable gaming and the charitable gaming manufacturers. It appears that each of the organizations and the manufacturers are required to file quarterly reports of gaming activity (a new requirement for manufacturers) but only one is required to pay the fee. The organizations seem to have the ultimate responsibility to ensure the fee is paid. The logistics and timing for obtaining this information may prove difficult for many organizations. Also, it appears that there are inconsistencies in the reporting forms, particularly Line 57b of Form 102.
Together, the administrative burdens and fees, the use of proceeds requirements and expense limitations, as proposed, threaten the continued operations of long-standing charitable organizations.
8. 11 VAC 20–20–600 provides procedural rules for the conduct of fact-finding conferences and hearings. Subsection B(1) states that “unless automatic revocation or immediate suspension is required by law…. no permit to conduct Charitable gaming… shall be denied suspended or revoked except upon… a fact-finding conference as set forth in… the administrative process act“.
It therefore appears that if an organization is “automatically” suspended or revoked for an alleged use of proceeds or other such violation, that those organizations are not entitled to an informal fact-finding conference, formal fact-finding conference, or other form of due process for such allegation. This certainly could not be an appropriate final remedy without providing some due process for a charity stripped of its permit and vested privilege in conducting such gaming. It is requested that all usual administrative process act rights and procedures be clearly granted to all operators subject to revocations and suspensions.
9. Consider expanding upon the current 11 VAC 15-40-147(C)4 to include other key employees and affiliates of the applicant among those whose convictions or violations would disqualify the manufacturer from obtaining a permit.