South Carolina              
Administrative Law Court
Edgar A. Brown building 1205 Pendleton St., Suite 224 Columbia, SC 29201 Voice: (803) 734-0550

SC Administrative Law Court Decisions

CAPTION:
SCDOR vs. McNickel's Inc., et al

AGENCY:
South Carolina Department of Revenue

PARTIES:
Petitioners:
South Carolina Department of Revenue

Respondents:
McNickel's Inc., AAA Entertainment, Corp, d/b/a AAA Amusements
 
DOCKET NUMBER:
97-ALJ-17-0092-CC

APPEARANCES:
For the Petitioner: Carol I. McMahan, Esquire

For the Respondent: H. Fred Kuhn, Jr., Esquire
 

ORDERS:

FINAL DECISION

STATEMENT OF CASE


This matter comes before me upon request for a hearing by the Respondent after being cited for violating S.C. Code Ann. § 12-21-2804 (A)(Supp. 1996). The South Carolina Department of Revenue (Department) contends that the Respondent operated more than five video poker machines in a "single place or premises." A hearing was held before the Administrative Law Judge Division on May 20, 1997.

I find the Respondents violated Section 12-21-2804.

FINDINGS OF FACT


Having observed the witnesses and exhibits presented at the hearing and closely passed upon their credibility, taking into consideration the burden of persuasion by the Parties, I make the following Findings of Fact by a preponderance of evidence:

1. Notice of the time, date, place and subject matter of the Hearing was given to the Petitioner and the Respondents.

2. The Department issued a Violation Report against McNickel's Inc. and AAA Entertainment Corp. on June 13, 1996, charging McNickel's Inc. with having more than five machines in a "single place or premises." The Department later amended the violation to include AAA Entertainment Corp. The Department offered no evidence as to whether each business had a separate electric meter or local sales tax license. Rather the sole issue for determination is whether the Respondents violated

S.C. Code Regs. § 117-190 (Supp. 1996) by failing to have "at least one separate employee on the premises during business hours."

3. On June 13, 1996, Revenue Officer Bruce Owens, conducted an investigation of the business located at 13 Northridge Plaza, Hilton Head, South Carolina. This structure is located in a strip mall. The structure contains the following rooms doing business as: Heritage Driftwood, McNickel's Inc., d/b/a McNickel's Sales and Service, AAA Entertainment Corp., d/b/a AAA Amusement, and Tropics, Inc.

4. Heritage Driftwood contained five Class III machines. When the Department's officers arrived at the location, Joe Marsili, who identified himself as an employee for that game room, stood in the doorway. Officer Owens then inspected the Heritage Driftwood location and found it to be in compliance.

5. McNickel's contained the following Class III licenses:

Machine License Number Licensee

026474 McNickel's Inc.

026475 "

026476 "

026477 "

026072 AAA Entertainment Corp.

6. The Department contends that the fact that the door to the location was open with the machines and lights on proves that McNickel's was open. However, the Department's witness testified that Joe Marsili said to him that McNickel's was closed and that he had failed to attach the chain back across the doorway because he was interrupted by the telephone. The Department's witness observed a chain hanging at the side of the entrance to McNickel's. Also, a telephone was located on the wall of McNickel's. Additionally, no customers were in this room at any time during the inspection. In fact, of the four rooms in this structure that contained Class III machines, this was the only room in which customers were not playing. The Respondent did not call Mr. Marsili as a witness or offer any evidence to show that McNickel's was closed.

The Respondent's argument that this evidence proves the game room was closed has merit. However, the Department established a prima facie case that the room was open. I find that the above evidence did not overcome the Department's prima facie case. Therefore, I find that this room was open.









7. AAA Amusements contained 5 Class III machines with the following Class III licenses:

Machine License Number Licensee

026078 AAA Entertainment Corp.

026238 "

026075 "

026080 "

026237 "

Customers were playing the machines in this room though no employee was present. After the initial inspection of AAA Entertainment Corp. an employee came into this room. However, the Respondent did not offer any evidence as to where this employee was, or how long they had been absent from the room.

8. The Department seeks a Five Thousand ($5,000.00) dollar assessment against each Respondent, AAA Entertainment, Corp. and McNickel's Inc.

9. I find that since the Respondent's video poker businesses did not have employees specifically assigned to each game room, the above two game rooms were not single places or premises. Therefore, I find that the Respondent violated S.C. Code Ann. § 12-21-2804 by having more than five machines in one location. The Department offered no evidence that the Respondent has previously violated the Video Game Machines Act. However, the Respondent had four game rooms operating with customers present in one of those rooms and only two employees on the premises. Therefore, I impose a $2,000 fine each upon McNickel's Inc and AAA Entertainment, Corp.

CONCLUSIONS OF LAW


Based upon the above Findings of Fact, I conclude as a matter of law, the following:

1. The Administrative Law Judge Division has jurisdiction to hear this matter pursuant to S.C. Code Ann. § 12-4-30 (D) (Supp. 1996) and S.C. Code Ann. § 1-23-320 (Supp. 1996).

2. The Department contends that the Respondent violated S.C. Code Ann. § 12-21-2804(A)(Supp. 1996). That section provides:

After July 1, 1994, the commission [Department] may not issue nor authorize to be maintained any licenses or permits for more than five machines authorized under Section 12-21-2720(A)(3) at a single place or premises.

3. Machines licensed under Section 12-21-2720(A)(3) include video games with a 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. S.C. Code Ann. § 12-21-2804(A) (Supp.1996) states that the penalty for failing to comply with the maximum number of machines in a "single place or premise" is the revocation of the licenses of machines located in the establishment.

5. S.C. Code Ann. § 12-21-2804(F) (Supp. 1996) states that a person who violates Section 12-21-2804(A) may be fined up to five thousand dollars.

6. The Department contends that the Respondents violated S.C. Code Ann. § 12-21-2804(A)(Supp. 1996). Section 2804(A) 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." However, the Video Game Machines Act does not define the term "single place or premises." On June 23, 1995, 27 S.C. Code Regs. 117-190 (Supp. 1996) became effective. It 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 firewalls 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.



7. Regulation 117-190 requires that each business must have a separate employee on the premises while the business is open. The cardinal rule of statutory interpretation is to ascertain and effectuate the legislative intent wherever possible. Bankers Trust of South Carolina v. Bruce, 275 S.C. 35, 267 S.E.2d 424 (1980). "Full effect must be given to each section of a statute, giving words their plain meaning, and, in the absence of ambiguity, words must not be added or taken away." Hartford Accident and Indem. Co. v. Lindsay, 273 S.C. 79, 254 S.E.2d 301, 304 (S.C. 1979). Thus, the phrase "on the premise" presumptively must have meaning. Therefore, the employees of a video poker business must be sufficiently connected to an open video game room as to indicate that each game room that is open for business has a specific employee assigned to work solely in that room.

In this case, the Respondent provided no testimony as to the employees assigned to McNickel's Inc. and AAA Entertainment, Inc. other than what the Department's agent testified he was told at the time of the violation. Respondent failed to offer any testimony whatsoever in this regard. In considering all the facts and circumstances of a particular case, failure to call a witness may create the inference that the witness's testimony would be unfavorable to that party's case. State v. Batson, 261 S.C. 128, 198 S.E.2d 517 (1973). This is especially true where an employer-employee relationship exits. Duckworth v. First National Bank, 254 S.C. 562, 176 S.E.2d 297 (1970). I find that such an inference is created in this case and it is compelling because here, Respondent called no witnesses at all.

8. The Department contends that the Respondent violated Regulation 117-190 by failing to maintain an employee in each business. The Department asserts that if an employee is not within the four walls of the business at the time of an inspection, the business is not a single place or premise as defined in Regulation 117-190. Therefore, the Department insists that the mere absence of an employee from the business constitutes conclusive proof that the owner violated the statute.

The Respondent contends that the Department interpretation of "premises" is "so rigid, narrow, impractical and nonsensical that it furthers neither the literal interpretation nor the presumed intent of the legislature." To the contrary, ;the Department argues that this criterion is necessary to curtail casino type operations in South Carolina. However, the Department cannot curtail such operations by violating the Respondent's due process rights or by applying fundamentally flawed reasoning. Furthermore, the Department's approval of multiple video game businesses under one roof created the very quagmire they seek to rectify by requiring that an employee remain within the four walls of each game room at all times.

In order to meet constitutional due process standards, a stature and therefore a regulation must give sufficient notice to enable a reasonable person to comprehend what is prohibited. State v. Crenshaw, 274 S.C. 475, 266 S.E.2d 661, cert. denied, 449 U.S. 883, 101 S.Ct. 236, 66 L.Ed.2d 108 (1980); Toussaint v. State Board of Medical Examiners, 303 S.C. 316, 400 S.E.2d 488 (1991) (the constitutional standard for vagueness is the practical criterion of fair notice to those to whom the law applies). Furthermore, penal statutes must be strictly construed against the state in favor of the citizen. Feldman v. S.C. Tax Commission, 203 S.C. 49, 26 S.E.2d 22 (1943). In that regard, Regulation 117-190 does not specifically state that, if an employee is not on the premises at all times, then a violation is presumed.

The Department's interpretation that an employee must physically remain within the four walls of each video game room at all times is based upon the presumption that all businesses maintain employees on the premises at all times, otherwise, the business is closed.(1) Therefore, the Respondent's business should have been closed, as each game room did not have an employee on the premises. Pursuant to that conclusion, the Department applies an irrebuttable or conclusive presumption that once the Department shows that an employee is not on the premises, that business does not qualify as a single place or premise.

Application of the proposition that the businesses should be closed whenever an employee leaves the premises creates a bright line standard to follow in future cases. A bright line test certainly creates both clarity and a straightforward method of dealing with this issue. However, if the bright line standard is not clearly supported by unassailable facts it becomes a standard of convenience that is simply not supported by due process. "This court has no legislative powers. In the interpretation of statutes our sole function is to determine and, within constitutional limits, give effect to the intention of the legislature, not interpret. The responsibility of the justice or wisdom of legislation rests exclusively with the legislature, whether or not we agree with the laws it enacts." Busby v. State Farm Mut. Auto. Ins. Co., 280 S.C. 330, 312 S.E.2d 716 (S.C. App. 1984).

To declare the existence of a presumption of fact, the court must determine that "the result presumed must be one which a reasonable person would draw from certain facts which have been proven to him. Its basis is logic [sic], its source is probability, and it rests on the observed connection between facts." Lawrence v. Southern Ry., 169 S.C. 1, 167 S.E. 839 (1933). I do not find support in the general knowledge of how businesses are conducted that all businesses, especially those in a "mall type" setting, close every time an employee steps out of the business. It is foreseeable that an employee of a business in a mall setting could step out of the business momentarily to service a customer's needs or for some business or personal reason.

The Department's inspection revealed that no employee was working within the four walls of two of Respondents' businesses. That evidence establishes a prima facie case or a rebuttable presumption that the business is not a single place or premise. The rebuttable presumption is supported by the general knowledge that businesses do not operate for any extended period of time without their employees present. Additionally, an employee's role and on-the-job conduct is within the Respondent's control. Therefore, once the Department establishes a prima facie case, the burden shifts to the Respondent to produce evidence that the business actually had a separate employee specifically assigned to that business. See, Stanley Smith& sons v. D.M R., Inc., 307 S.C. 413, 415 S.E.2d 428 (Ct. App. 1992). Furthermore, the Respondent must demonstrate that the employee's absence from the game room was of short duration and reasonable under the circumstances. A violation of Reg. 117-190 will still occur whenever an employee is absent from the premises for a prolonged period of time, or the reasons for the absence do not involve a reasonable business or personal need. Such determinations will depend greatly on the specific factual circumstances, and must be evaluated on a case-by-case basis.

9. Respondent argues that Regs. 117-190 is beyond the Department's authority to promulgate rules and regulations as it alters or amends the statute. An administrative regulation is valid so long as it is reasonably related to the purpose of the enabling legislation. Hunter & Walden Co. V. S.C. State Licensing B. For Contractors, 272 S.C. 211, 251 S.E.2d 186 (1978). In Young v. South Carolina Dept. Of Highways and Public Transp., 287 S.C. 108, 336 S.E.2d 879 (S.C. App. 1985) the Court upheld a Highway Department's regulation which defined the term "transient or temporary." The Court held:



While the General Assembly did not define "transient or temporary" by statute, it has implicitly authorized the Department to interpret, clarify and explain the statute hy authorizing the Department to promulgate regulations governing outdoor sign permits. Administrative agencies may be authorized " 'to fill up the details' by prescribing rules and regulations for the complete operation and enforcement of the law within its expressed general purpose." Heyward v. South Carolina Tax Commission, 240 S.C. 347, 355, 126 S.E.2d 15, 19-20 (1962); 73 C.J.S. Public Administrative Law and Procedure Section 67 (1983) (in the first instance, defining a particular statutory term is an administrative function). We hold the Department's definition is not overly restrictive and further the definition provides specific time limitations which will assure that the statute will be applied in a consistent manner. See Boucher Outdoor Advertising Co. V. Minnesota Department of Transportation, 347 N.W.2d 88, 91 (Minn. App. 1984).

In this case the General Assembly did not define the term "single place or premises." However, S.C. Code Ann. § 12-21-2798 (Supp. 1996) provides that "[the commission shall promulgate rules and regulations pertaining to the machines and persons licensed by it." Therefore, the Department was authorized to clarify the phrase "single place or premises" contained in Section 12-21-2804(A). Furthermore, Regulation 117-190, as applied above, is not an overly restrictive definition of that term and merely clarifies the terms set forth in Section 12-21-2804(A).

10. It is a generally recognized principle of administrative law that the fact finder has the authority to impose an administrative penalty after the parties have had an opportunity to have a hearing and be heard on the issues. See Ohio Real Estate Comm'n v. Aqua Sun Investments, 655 N.E. 2d 266 (Ohio 1995); Shadow Lake of Noel, Inc. v. Supervisor of Liquor Control, 893 S.W. 2d 835 (Mo. App. S.D. 1995); Matter of Henry Youth Hockey Ass'n, 511 N.W. 2d 452 (Minn. App. 1994); Vermont Agency of Natural Resources v. Duranleau, 617 A.2d 143 (Vt. 1992); City of Louisville v. Milligan, 798 S.W. 2d 454 (Ky. 1990); Com., Dept. of Transp. v. Slipp, 550 A.2d 838 (Pa. 1988); Dept. of Transp. v. Miller, 528 A.2d 1030 (Pa. 1987); State Police v. Cantina Gloria's, 639 A. 2d 14 (Pa. 1994).

Prior to governmental restructuring, a commission, sitting in its adjudicatory capacity imposed penalties for violations of statutory provisions administered by the Commission's subordinate agency. In its capacity as the fact-finder, the Tax Commission would conduct an adjudicatory hearing in all contested cases arising under Title 12 of the South Carolina Code, and would render an order containing findings of fact and conclusions of law. As the fact-finder, it was the commission'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). With the advent of restructuring and the abolition of the Tax Commission, the Administrative Law Judge Division was given the authority to hear "all contested cases, as defined by Section 1-23-310 and as previously considered by the three [Tax] commissioners. . . ." S.C. Code Ann. §12-4-30(D) (Supp. 1996). The Administrative Law Judge, as the current fact-finder, must also impose a penalty based on the facts presented at the contested case hearing. Parties are entitled to present evidence on all issues arising out of the contested agency action and the tribunal responsible for conducting the contested case proceedings has the authority to decide the issues based on the facts presented, and make the final decisions on all the issues, including the appropriate penalty.

ORDER


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

ORDERED that the licenses listed in Findings of Fact paragraphs five and seven are revoked, and a fine of $2,000.00 each is imposed upon McNickel's Inc. and AAA Entertainment Corp, resulting in a total fine of Four Thousand ($4,000.00) Dollars.

IT ITS FURTHER ORDERED that no permits shall be issued for any Class III machine to be operated in any of the above game rooms for a period of six (6) months from the date of this Final Decision.







___________________________

Ralph King Anderson, III

Administrative Law Judge




Columbia, South Carolina

July 18, 1997

1. If the Department's reasoning is not based upon the premise that all businesses maintain employees on the premises at all times, otherwise the business is closed, then their reasoning is flawed, If all businesses do not close when an employee leaves the premises, their conclusion is based upon the premise that some or most businesses maintain employees on the premises at all times, otherwise the business is closed. Creation of an irrebuttable presumption based upon historical facts that sustain the presumption only under some , but not all of the possible circumstances would be fundamentally unfair.


Brown Bldg.

 

 

 

 

 

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