Operators of amusement video games in hundreds of corner bars and mom-and-pop convenience stores cheat the state out of $15 million annually in uncollected tax revenue and make illegal payments to players, according to a report released yesterday by the Abell Foundation.
The study of the vending machine industry in Baltimore City and Baltimore County found that operators of the games, including video poker, under report their taxable earnings by $63 million to $153 million a year. And that as a result, residents in both municipalities are missing out on millions in possible revenue.
The foundation recommends banning the machines or legalizing gambling activities associated with them so that income from the games can be better regulated.
"Citizens are the losers with the current system," Joan Jacobson, a former Sun reporter, wrote in the report she did for Abell, which works to find solutions to urban poverty.
The report details how bar, gas station and package-goods store employees pay out winnings on the amusement video games, even though it is illegal. In most cases, employees keep tabs on payouts on the games on tablets they keep hidden from police. They also record payouts in code that is difficult to decipher, according to police reports.
Abell Foundation President Robert Embry declined to comment on the report, but a spokeswoman said the foundation is not endorsing legalizing slot machines, an issue that has bedeviled Gov. Robert L. Ehrlich Jr., a slots advocate. Last week, he introduced legislation that would authorize up to 15,500 video lottery terminals at six locations.
Illegal payouts on amusement devices, which operate differently than slot machines, is nothing new. But monitoring the industry can be difficult. Although the city and county license the games and collect annual fees from game owners, it is done on the honor system. Officials said they lack adequate inspection staffs to visit every tavern and restaurant to make sure the games are licensed.
"The Police Department's primary focus is crime," said Edward J. Gallagher, the city's director of finance. "And so many of our resources are pointed toward that."
A spokesman for Baltimore County Executive James T. Smith Jr. declined to comment on the report pending further review.
A spokesman for Comptroller William Donald Schaefer said that the state also lacks resources to properly track the industry, which pays an annual "admissions and amusement tax."
"We have four auditors to do the entire state," said spokesman Michael Golden, referring to the staff that tracks amusement tax payments. "But even if we had an army, it would be difficult to collect because it is sort of an invisible industry."
The recent conspiracy and bribery trail of vending machine owner Gilbert Sapperstein, however, has provided a glimpse into that world. In August, Sapperstein was sentenced to 18 months in jail for his role in a scheme to steal $3.5 million from the city school system and the Public Works Department. And though the focus was on Sapperstein's boiler company, his vending machine business, Star Coin Machine Co., as well as other business ventures, were also exposed.
According to city and state records, Sapperstein has dozens of registered video gambling machines, many of which are in bars where he also controls the liquor license. Sapperstein, like many other vending machine business owners, makes high-interest loans to bar owners with the understanding that they will put his video amusement machines in their establishments.
If a bar owner fails to pay off the loan, vending machine operators take over the liquor license, which they then sell on the open market for $50,000 to $75,000.
John Vontran, immediate past president of the Baltimore City Licensed Beverage Association and the owner of two vending machine companies, said he does not disagree with the Abell report, but he added that most vending machine owners are honest when it comes to reporting annual income from machines.
Vontran recently worked with the City Council to introduce legislation that would increase the number of amusement devices allowed in city taverns and other venues. The bill was introduced by City Council President Sheila Dixon a few days after Vontron held a fundraiser at his home for Mayor Martin O'Malley.
Vontran said the timing of the two events was coincidental.
He confirmed that O'Malley recently returned $4,000 to him as a result of an inquiry by the state prosecutor's office which found that he had exceeded the contribution limit for an individual.