SC Administrative Law Court Decisions

This matter comes before me pursuant to S.C. Code Ann. § 12-4-30 (D)(Supp. 1995) and S.C. Code Ann. § 1-23-320, et seq. (Supp. 1995) pursuant to a request for a contested case hearing by Great Games, Inc., owner/licensee, and Busters, Inc. (collectively referred to as "Respondent"). The South Carolina Department of Revenue ("Petitioner" or "Department") issued citations against Respondent for alleged administrative violations of S.C. Code Ann. § 12-21-2804(A)(Supp. 1995) of the Video Game Machines Act ("Act") and S.C. Code Regs. 117-190 (Supp. 1995) ("Regulation") at its business located at 532 St. Andrews Road, Columbia, South Carolina ("location"). Specifically, the Department alleges that Respondent did not have a separate employee within each of its six single places or premises ("game rooms") at the location during business hours on September 12, 1995. Respondent denies its actions constitute a violation of the Act and the Regulation.

The Petitioner seeks revocation of the thirty (30) class III video poker licenses at the location, a $5,000.00 fine and an Order prohibiting the use by Respondent of any class III video poker licenses at the location for a period of six months from the date of the license revocation.

After timely notice to the parties, a contested case hearing was held at the Administrative Law Judge Division ("Division") offices, Columbia, South Carolina on September 23, 1996.

Based upon a thorough review of the record, post-hearing legal briefs, the relevant and probative evidence and applicable law as set forth hereafter, I conclude that the Respondent violated

S.C. Code Ann. §12-21-2804(A) and S.C. Code Regs. 117-190 by failing to have a separate employee for each of the six game rooms in question.

ISSUES

1. Is S.C. Code Regs. 117-190 (Supp. 1996) a valid constitutional regulation of video poker machines in South Carolina?

2. If it is, do its provisions require each separate "single place" or "premises" to have an employee physically within its four walls during all business hours?

3. If there is a violation, what is the appropriate penalty?

EVIDENCE

Without objection, Petitioner placed into evidence the following exhibits:

Exhibit l: Floor Plan/Drawing of the location showing the six separate businesses/game rooms, the common area, office and rest rooms.

Exhibit 2: A listing of the license number on each video machine located within each of the six separate business locations.

Exhibit 3: Six (6) photographs taken of the inside of the separate businesses at the location.

Exhibit 4: Six (6) Business Tax Applications, each dated April 21, 1995, filed by the Respondent with Petitioner for businesses known as Players Club, Club House, Sands, Players Club II, Club House II and Sands II.

Exhibit 5: Four (4) Biennial Coin-Operated Device Applications for Class III licenses dated December 3, 1994, October 3, 1995, October 2,1995 and September 29, 1995.

Exhibit 6: Letter from the Office of the Chief Counsel of Petitioner to Shay Martin, secretary of Busters, Inc., dated March l9, 1996.

Revenue Officer Donald Frick testified on behalf of the Petitioner. No testimony was presented by Respondent.

FINDINGS OF FACT

Having carefully considered all testimony and arguments presented at the hearing, taking into account the credibility of the one witness, the accuracy of the evidence and having reviewed all the exhibits carefully, I make the following findings by a preponderance of the evidence:

1. This Division has personal and subject matter jurisdiction.

2. Notice of the date, time, place and nature of the hearing was timely given to both parties.

3. Respondent/Busters, Inc. owns and operates six separate video game businesses. Each business operates within a separate room within a mall setting located at 532 St. Andrews Road, Columbia,

South Carolina. All class III video game machines located in each of the six businesses are owned by the respondent, Great Games, Inc.

4. Within the physical structure containing the mall is the business known as the "Player's Club" which is owned by the respondent, Buster's, Inc. The physical structure consists of two restrooms, an office, six small rooms (game rooms containing video machines) and a common area in which is located a snack area. The six game rooms are known and operated as individual businesses called the Players Club, Players Club II, Sands, Sands II, Clubhouse and Clubhouse II.

5. Each of the six game rooms is surrounded by interior walls within the building which constitute exterior walls for purposes of each individual business. The only means of entry and exit to and from each game room is through the hall and commons area. One cannot go directly from one game room into another.

6. The Players Club and Players Club II game rooms each contain five Class III video game for a total of ten. The biennial license numbers for the machines are: 60392, 60383, 60327, 60384, 60336, 60379, 60338, 60361, 60339, and 60365.

7. The Clubhouse and Clubhouse II game rooms contain a total of ten Class III video game machines with biennial license numbers: 60312, 60346, 60386, 60320, 60330, 60311, 60347, 60375, 60417 and 60366.

8. The Sands and Sands II game rooms contain ten Class III video game machines with biennial license numbers: 60317, 60328, 60363, 60333, 60387, 60329, 60326, 60374, 60313 and 60337.

9. Each of the six game rooms or businesses has a separate State sales tax license.

10. On September 12, 1995, Revenue Officer Donald Frick went to the location at 532 St. Andrews Road, Columbia, South Carolina. He observed the mall and hall areas and the six game rooms within the building. He saw no employees inside any of the six game rooms; however, the overhead lights were on in each room as were all the video game machines. Also, he observed that the doors leading into each of the six rooms were open. There were no "closed" signs on the doors or at the entryways leading into any of the six game rooms.

12. In January of 1996, Revenue Officer Frick went to the same location and took a number of photographs therein. See Exhibit 3. The layout of each game room and the location of the video game machines within each room were the same on that day as they were on September 12, 1995. On the second visit the doors at the entrance to four of the game rooms were closed and had "closed" signs on them; the doors to the other two game rooms were open. Two employees were in the "common area."

13. On the September, 1995 visit by the Revenue Officer, Respondent had two employees at the location. They were standing in the hall or common area equidistant between the doorways leading into the game rooms called Players Club and Players Club II. See Exhibit 1.

14. The Department did not cite the Respondent for any violations concerning a failure to have separate electric meters or separate business licenses at any of the six game rooms.

15. As a result of the inspection on September 12, 1995, Revenue Officer Frick issued a citation to Respondent for not having an employee physically present within the physical premises of each of the six game rooms or businesses.

16. On the date of his visit, Revenue Officer Frick did not know the operating hours of the six game rooms when he issued the citation (September 1995). Further, he did not know the assignments, duties or responsibilities of the two employees within the location on that date.

17. Absent any testimony or evidence presented to the contrary, I find that all six game rooms were open for business on September 12, 1995 and that two employees were present and on the premises during the visit by Revenue Officer Frick. Further, I find that they were responsible for the oversight and management of all six businesses and game rooms on that date.

18. No citation reports were placed into the record by the Department.

HISTORICAL BACKGROUND

The South Carolina Video Game Machines Act is a comprehensive statutory scheme which regulates the video gaming industry. The Video Game Machines Act is a validly enacted regulation of legalized gambling passed by the South Carolina Legislature in accordance with its police powers. The provision of the Act which is at issue in this case is S.C. Code Ann. §12-21-2804(A), which provides in pertinent part:

No person shall apply for, receive, maintain, or permit to be used, and the commission shall not allow to be maintained, permits or licenses for the operation of more than. . . . five machines authorized under Section 12-21-2720(A)(3) at a single place or premises. . . .

As a result of the passage of the Act, litigation ensued whereby members of the video gaming industry sought clarification of certain of the Act's provisions, particularly the limit on the number of machines at a "single place" or "premise," from the courts and the Division. The Department prepared and distributed a publication entitled "A Guide to Conducting Video Gaming Establishments in South Carolina" as an aid to taxpayers in understanding the requirements and definitions of the Act. It also published and distributed S.C. Revenue Procedure # 94-2 and S.C. Information Letter # 94-12, dated March 23, 1994 and May 18, 1994 respectively, which outlined revenue procedures concerning the statutory restrictions on the number of machines allowed at a "single place" or "premise." Thereafter, on May 25, 1994, the Department issued S.C. Information Letter # 94-13 which modified S.C. Revenue Procedure # 94-2 by adopting the Attorney General opinion dated March 24, 1994, which resulted from an inquiry from the Honorable Greg Gregory, Senator for South Carolina District No. 16.

The video gaming industry also challenged the constitutionality of the Act in Reyelt v. S. C. Tax Comm'n, C.A. Nos. 6: 93-1491-3 and 6: 93-1493-3 (D.S.C. Nov. 15, 1993). In Reyelt, U.S. District Judge G. Ross Anderson held that the terms "single place," "establishment," "location," and "premises," although not specifically defined in the Act, were sufficiently definite and susceptible of a common and ordinary meaning to provide a person of ordinary intelligence a reasonable notice of the proscribed conduct.

Finally, as a result of the continuing claims of confusion within the coin-operated device industry, the Department promulgated Document No. 1827 as S.C. Code Regs. 117-190, which became law in South Carolina on June 23, 1995. This regulation defines:

1. "Single Place" or "Premises" and sets out four factors or criteria which must be satisfied by an entity to meet the definition. They are: (1) Does each entity or business have a separate electric utility meter? (2) Does each entity or business have at least one separate employee on the premises during business hours? (3) Does each entity or business have a separate local business license where required? (4) Does each entity or business have separate sales tax licenses?

2. "Inducements" and outlines various examples which would subject the location to various civil or criminal penalties.

3. "Advertising" as any attempt to call attention to, or make known, to the general public that video game machines as defined in §12-21-2772(5) are available for play. Such advertising is strictly prohibited by statute.

4. "Measurement of Distance" which requires a minimum of 500 feet in distance between any location which allows or operates coin-operated machines from various defined schools, universities, parks, playgrounds and churches.

DISCUSSION

I. Interpretation of and Constitutionality of S.C. Code Regs. 117-190

The Respondent contends that S.C. Code Regs. 117-190, particularly the requirement that each separate place or premises have an employee on-site at all times during business hours, is not a constitutional regulation of the video gaming industry. It is well established in South Carolina that a statute enacted by the legislature is presumed constitutional, and that the party attacking the statute bears the burden of proving its unconstitutionality beyond a reasonable doubt. Nichols v. S. C. Research Authority, 290 S. C. 415, 351 S.E.2d 155 (1986). The general rule is that "[r]egulations authorized by the legislature have the force of law". Goodman v. City of Columbia, 458 S.E.2d 531, 532 (1995). The burden requires the party attacking constitutionality to "negative every conceivable basis which might support it." North Charleston Land Corporation v. City of North Charleston, 281 S.C. 470, 316 S.E.2d 137 (1984), citing Lehnhausen v. Lake Shore Auto Parts Company, 410 U. S. 356 (1973) (quoting Madden v. Kentucky, 309 U. S. 83 (1940)). Consequently, before Regs. 117-190 may be declared unconstitutional, the Respondent bears the burden of proving its unconstitutionality "beyond a

reasonable doubt." That burden further requires the Respondent to negative every conceivable basis which might support its constitutionality.

Respondent has failed to meet this burden of proof. No arbitrariness has been shown nor is the regulation unreasonable, oppressive or violative of the statutes and constitutions of this State and the United States. The delegation of power by the legislature to the Department through statutes to revoke licenses and impose monetary penalties for violations of the provisions of section 12-21-2804 of the Video Games Machine Act is clear. The regulation enumerates various requirements which must be met in order for an establishment to be a "single place" or "premises" within the meaning of §12-21-2804(A). Generally, a location must be physically separated from other businesses, have indicia of a separate business and have its own separate employee(s).

The enactment of the regulation was clearly within the Department's authority to promulgate regulations "pertaining to the machines and persons licensed by it." S.C. Code Ann. §12-21-2798 (Supp. 1995). However, any regulation promulgated by the Department must be "reasonably related to the purpose of the enabling legislation". Young v. S.C. Dept. of Highways and Public Transportation, 287 S.C. 108, 336 S.E.2d 879 (Ct. App.1985); Hunter & Walden Co. Inc., v. S. C. State Lic. Bd. for Contractors, 272 S. C. 211, 251 S.E.2d 186 (1978). Our courts have held that a regulation "must fall when it alters or adds to a statute." Society of Professional Journalists v. Sexton, 283 S.C. 563, 324 S.E.2d 313, 315 (1984); Charleston Television, Inc. v. South Carolina Budget & Control Board, 296 S.C. 444, 373 S.E.2d 892, 903 (Ct. App. 1988).

The tests in Regs. 117-190 which require each business to have its own separate business license, sales tax license and electric utility meter as outlined in the regulation are not overly restrictive. They are indicia of separate businesses and are reasonable and practicable. Further, they assure a procedure for the application of § 12-21-2804 in an orderly and consistent manner. They do not lessen or enlarge the powers of the Department, but are reasonable for the enforcement of the provisions of this section. Further, they are reasonably related to and are designed to further the purpose of the Video Game Machines Act.

With respect to the requirement that each separate business "have at least one separate employee on the premises during business hours," it is evident that the intent of the Department was to prevent an owner, operator, or licensee from placing and maintaining video machines inside separate game rooms within one mall-type facility and employing a limited staff to oversee and manage all of them. Its position was that such an arrangement would be an abuse of and contrary to the intent of the legislature in its passage of this Act. I find that this requirement is also reasonably related to and is designed to further the purpose of the Video Game Machines Act, in that it is a factor which distinguishes a truly separate place of business.

However, although several of my fellow judges have previously interpreted the separate employee test of regulation 117-190 as requiring that an employee must physically remain within the four walls of each business entity to which he is employed or assigned every minute he is employed and assigned to that business or game room, I must respectfully disagree. In my opinion such an interpretation is too restrictive when analyzed in light of the economic reality of hiring and maintaining employees at any business location.

There are many separate businesses in both large enclosed malls and in strip malls. Most, if not all, will normally have at least one employee on the premises to assist customers, make change, and handle sales transactions. The nature of each business, including the type of product or service sold or provided, determines its need for employees and their number. If the nature of a business does not require the presence of an employee, then "good business" sense will dictate that management not provide an employee at that location. Furthermore, business activity and work responsibilities dictate the job function of an employee. In those businesses where the job consists primarily of making change or other simple tasks, when no customers are present within the four walls of the business the employee may be authorized to go outside the four walls of the business. He may greet potential customers. However, the employee remains in close proximity to the location. He is ready to provide the services for which he was hired. Respondent concedes that most businesses have on-site employee(s). Even so, it argues that the economic reality in the "game room workplace" is that one employee can safely and effectively operate more than one game room. Notwithstanding this argument, the intent of the legislature is to limit five video machines to any one separate video game business entity and to require that each separate video game business entity employ or have assigned to it at least one employee who will be at the business during its hours of operation.

It makes common sense that the Department, pursuant to its mandate by the legislature to promulgate regulations clarifying and interpreting the Act, would require each business to have an employee. However, the interpretation of the separate employee requirement suggested by the Department, which subjects the owner of a "single place" or "premise" to the revocation of the licenses of all video machines located therein, the inability to obtain new licenses for six months at the location and a monetary penalty of $5,000.00 for failure of an employee to remain within the four walls of the single place of business is unduly harsh and constitutes more than a mere interpretation or clarification of the statute. The test does not require an employee to physically be within the walls of the premises during all business hours. The intent of the Act is not frustrated if an employee is not within a "single place or premises" when no customers are present and there are no work requirements to be performed inside the business. A better interpretation of the separate employee test is that if an employee is outside the four walls of the business entity but can observe it and is performing his job functions, then the intent and literal meaning of this factor has been met and complied with.

On September 12, 1995, all six game rooms were in operation at the location and there were only two employees at the location. They were standing in the common area outside two of the game rooms. No evidence was provided to the court that either of these two employees were or were not employees of any of the six specific businesses or game rooms. However, the evidence is clear that they worked for the respondent and were assigned to work in the businesses at the location. Accordingly, under the interpretation of the regulation as set forth above, I find that the respondent was in violation of §12-21-2804(A) and Regs. 117-190.

II. Equal Protection Clause

Respondent also argues that the regulation violates the Equal Protection Clause. This argument is also without merit. The power of a State to suppress gambling is virtually unrestrained. Ah Sin v. Wittman, 198 U.S. 500 (1905). There is no fundamental right to gamble which is protected by the U. S. Constitution. Lewis v. United States, 348 U.S. 419 (1955). Accordingly, respondent need not be treated the same as other economic and business enterprises. However, all members of its class, i.e., those who gamble or conduct such operations, must be treated the same. Although the Equal Protection Clause of the Fourteenth Amendment provides that no state shall "deny to any person within its jurisdiction the equal protection of the laws", this mandate has been interpreted to require that all similarly situated persons be treated alike. Plyler v. Doe, 457 U.S. 202 (1982). In this instance, all members of the video gaming industry are subject to the same requirements. Therefore, the mandate of the Equal Protection Clause has been met.

What makes good business practice for the Respondent is not the real issue in this case. Respondent mistakes its economic needs and self-interest in justifying only one employee to conduct five, six or more of its businesses in a mall facility. Respondent is concerned with good business practices and profitable businesses. However, the State has the responsibility of minimizing the adverse impact of gambling on its citizens by prohibiting the operation of large gambling casinos within its borders and thus passed these statutes for that reason. In furtherance of its duty and responsibility, the Department properly promulgated Regs. 117-190 to clarify the terms "single place" or "premises" in §12-21-2804(A) and to allow for uniform enforcement of the statute. The regulation is helpful to the video machine industry in defining the parameters and framework within which it may conduct its businesses, while at the same time minimizing the adverse impact of gambling on the citizens of South Carolina by ensuring that gambling operations remain small and are unobtrusive.

CONCLUSIONS OF LAW

Based on the foregoing Findings of Fact and Discussion, I conclude, as a matter of law, the following:

1. Pursuant to S.C. Code Ann. § 12-4-30 (D) (Supp. 1996) and Chapter 23 of the Title 1 of the 1976 Code, as amended, the South Carolina Administrative Law Judge Division has jurisdiction in this matter.

2. S.C. Code Ann. § 12-21-2804(A) (Supp. 1996) prohibits the operation of more than five video game machines authorized under S.C. Code Ann. § 12-21-2720(A)(3) at a single place or premises.

3. Machines licensed under S.C. Code Ann. § 12-21-2720(A)(3) include video games with free play feature operated by a slot in which a coin or thing of value is deposited. S.C. Code Ann. § 12-21-2720 (Supp. 1996).

4. Pursuant to S.C. Code Ann. § 12-21-2798 (Supp. 1996), the Department is authorized to promulgate regulations to assist in the administrative and enforcement of the Video Game Machines Act.

5. 27 S.C. Code Regs. 117-190 (Supp. 1996) defines "single place or premises" for purposes of interpreting the Video Game Machines Act, including Section 12-21-2804(A). It provides:

A "single place" or "premises" means a structure surrounded by exterior walls or fire walls consistent with the requirements of the applicable building code (or where no building code is applicable, a one hour rated firewall), provided such exterior walls and fire walls may not have any windows, doors or other openings leading to another area where video game machines are located.

If a structure surrounded by exterior walls has two or more areas where video game machines are located, each surrounded by exterior walls or fire walls as defined and required above, the Department must review all the facts and circumstances to determine if each area in reality constitutes a single place or premise for video game machines. In determining whether each entity is in fact a single place or premises, the Department of Revenue will consider the following factors: (1) Does each entity or business have a separate electric utility meter? (2) Does each entity or business have at least one separate employee on the premises during business hours? (3) Does each entity or business have a separate local business license where required? (4) Does each entity or business have separate sales tax licenses? A positive answer to these four questions is required for each area to be considered a "single place or premise" for purposes of the Video Game Machines Act.

6. The second criterion of Regs. 117-190 only requires that each separate game room have an employee working on the premises during business hours. There is no requirement that the employee remain within the four walls of the premises every minute he is on duty. An individual employed to work in a specific game room from time to time may stand outside. If he continues to observe the game room operation and remains in control of its operation, standing ready to assist in the totality of its operation, this criterion is complied with. In interpreting this regulation, the court must look to the purpose of the legislature in enacting § 12-21-2804(A) as a part of the Video Game Machines Act. Our courts have held that "all rules of statutory construction are subservient to the one that legislative intent must prevail if it can be reasonably discovered in the language used, and that language must be construed in the light of the intended purpose." Lewis v. Gaddy, 254 S.C. 66, 71, 173 S.E.2d 376, 378 (1970). Further, our Court has stated that "the language of a revenue statute must not be extended beyond its clear import, the taxpayer being entitled to favorable resolution of any substantial doubt arising therefrom." Deering Milliken, Inc. v. S.C. Tax Comm'n, 257 S.C. 185, 187-88, 184 S.E.2d 711 (1971). Further, our Court has stated the rule that "The legislature must have intended to mean what it has plainly expressed, and consequently there is no room for construction...." Beaty v. Richardson, 56 S.C. 173, 34 S.E. 73 (1899).

The purpose of the Video Game Machines Act is to prevent large-scale casino type gambling operations in the State of South Carolina. Its intent is to limit five machines to each single place or business. The Department has promulgated Regs. 117-190 to clarify the statute and to assist in its implementation. It has not and can not add to or alter the statute. Society of Professional Journalists v. Sexton, 283 S.C. 563, 324 S.E.2d 313 (1984). The interpretation of the statute by the Department that a business entity must have an employee within the four walls of the business premises at all times adds to and alters the statute. Criterion # (2) is reasonable in its interpretation and application only to the extent that it requires the employment of an individual at each place or business during working hours but not to the extent it requires the employee to remain with the confines of the business at all times.

In this case, the evidence was uncontroverted that there were only two employees at the location. No evidence was offered to show that they were employees hired for any specific game room or business. All six of the game rooms were open for business at the time of the inspection in September, 1995. The machines were plugged in and were available for play. The doors to all six of the game rooms were open. Therefore, I conclude that the respondent violated S.C. Code Ann. Section 12-21-2804(A) by failing to have an employee on hire for each of the six game rooms during their business hours.

7. A Violation Report must be written for each specific game room lacking a separate employee working within its confines for which customers were able to enter and operate machines. An officer must determine the specific game rooms in violation and identify those with particularity in the citation, rather than merely subtracting the total number of employees in the mall from the total number of game rooms and then citing the appropriate number of game rooms on an arbitrary basis. S.C. Code Ann. § 12-21-2804(A) (Supp. 1996).

8. A person found to have violated S.C. Code Ann. § 12-21-2804(A) (Supp. 1996) is subject to a fine of up to five thousand dollars and automatic revocation of the licenses of machines located in the establishment in noncompliance. Additionally, no license may be issued for a machine in an establishment in which a license has been revoked for a period of six months from the date of revocation.

9. Acting as fact-finder, it is the administrative law judge's prerogative "to impose the appropriate penalty based on the facts presented." Walker v. South Carolina ABC Comm'n, 305 S.C. 209, 407 S.E.2d 633, 634 (1991). In the present case, the administrative law judge has the authority to establish the monetary fine within the allowable range provided for by S.C. Code Ann. § 12-21-2804(A) (Supp. 1996). S.C. Code Ann. § 12-4-30(D) (Supp. 1996).

10. An administrative law judge possesses the same powers at chambers or in open court as do circuit court judges and may issue such remedial writs as are necessary to give effect to its jurisdiction. S.C. Code Ann. § 1-23-630 (Supp. 1996).

ORDER

Based upon the foregoing Findings of Fact, Discussion and Conclusions of Law, it is hereby:

ORDERED that Respondent/Great Games, Inc. is subject to a fine of $250.00 for each of the six (6) violations of S.C. Code Ann. § 12-21-2804 (A) (Supp. 1996), for a total of $1,500.00, and it is further

ORDERED that the licenses for the ten Class III video game machines at the Players Club and Players Club II game rooms with the biennial license numbers 60392, 60383, 60327,60384, 60336, 60379, 60338. 60361, 60339, and 60365; the licenses for the ten Class III video game machines at the Clubhouse and Clubhouse II game rooms with the biennial license numbers 60312, 60346, 60386, 60320, 60330, 60311, 60347, 60375, 60417 and 60366; and the ten Class III video game machines at the Sands and Sands II game rooms with biennial license numbers 60317, 60328, 60363, 60333, 60387, 60329, 60326, 60374, 60313 and 60337 are hereby revoked, and it is further

ORDERED that no licenses shall be issued for any class three video poker machines to be operated in any of the above-listed game rooms at the location at 532 St. Andrews Road, Columbia, South Carolina for a period of six (6) months from the date of this Final Decision.

AND IT IS SO ORDERED.

_______________________________________

Marvin F. Kittrell

Chief Judge

Columbia, South Carolina

April 7, 1997