SC Administrative Law Court Decisions

Pursuant to S. C. Code Ann. §§ 1-23-110 and 1-23-111 (Supp. 1996), a public hearing was held on May 6, 1997 at the Administrative Law Judge Division to determine the "need and reasonableness" of the proposed amendment to S.C. Code Regs. 117-190 (Supp. 1996). The proposed amendment is intended to redefine the term "single place or premises." The South Carolina Department of Revenue ("Department") and interested persons presented testimony and written materials relating to the proposed regulation, all of which were incorporated into the record of the hearing.

The following Proponents of the proposed regulation participated in the public hearing:

Nicholas P. Sipe, Esquire, representing the South Carolina Department of Revenue

Dr. L. Wayne Bryan, representing the South Carolina Christian Action Council

Mrs. Liz Gilland, representing the Horry County Council

Mr. Randolph G. Flowe, representing the South Carolina Coin Operators Association

The following Opponents of the proposed regulation participated in the public hearing:

James B. Richardson, Jr., Esquire, representing Mickey H. Stacks

Dr. Randolph C. Martin, representing South Carolina Video Mall Association

Kenneth E. Allen, Esquire, representing Carolina Entertainment Association

David E. Belding, Esquire, representing Hot Rods

Robert E. Kneece, Esquire, representing Munn Associates

John C. West, Jr., Esquire, representing Monte Carlo, Inc.

Robert P. Lusk, Esquire, representing North of the Border

Based upon the statements, testimony, exhibits, written comments, and applicable law, I find and conclude the following:

1. S.C. Code Ann. § 1-23-111(B) (Supp. 1996), sets forth that this Court must make findings as to the need and reasonableness of the proposed regulation and "may include suggested modifications to the proposed regulations in the case of a finding of lack of need or reasonableness."

2. The Notice of Drafting of the proposed regulation was published in the State Register on January 24, 1997.

3. The Department filed an Agency Transmittal Form with the Administrative Law Judge Division on March 7, 1997 requesting a public hearing on the proposed regulation.

4. The Notice of Proposed Regulation was published in the State Register on March 28, 1997 which included a synopsis of the proposed regulation and the Notice of Opportunity for Public Comment and Hearing.

5. The Department complied with all notice and procedural requirements of the APA and the Administrative Law Judge Division Rules of Procedure.

6. A public hearing to allow the Department's presentation and public comment was conducted on May 6, 1997 pursuant to S.C. Code Ann. § 1-23-111 at which time this Court received oral testimony, exhibits, and written comments from the Department and interested persons.

7. The Department seeks to amend Regulation 117-190 in order to redefine the term "single place or premises" as set forth in S.C. Code Ann. § 2804(A)(Supp. 1996). That section provides:

No person shall apply for, receive, maintain, or permit to be used, and the commission [Department] shall not allow to be maintained, permits or licenses for the operation of more than eight machines authorized under S.C. Code Ann. § 12-21-2720 (A)(3) at a single place or premises. . . .

The Video Game Machines Act did not define the term "single place or premises." However, the Honorable G. Ross Anderson held that the term "single place or premises" is "sufficiently definite and susceptible of a common and ordinary meaning to provide a person of ordinary intelligence a reasonable notice of the prescribed conduct." Reyelt, et al. v. South Carolina Tax Commission, CA No. 6: 93-1491-3 (D.S.C. July 5, 1994). Afterwards, the Department issued S.C. Revenue Procedure #94-2 that advised video poker operators of twelve factors considered by the Department in determining whether a business is a "single place or premises." Subsequent to issuing Revenue Procedure #94-2, the Department then issued Information Letter #94-13, amending the Revenue Procedure. In that Letter, the Department adopted an Attorney General's opinion issued March 24, 1994 that explained that "subdividing a single building or structure with partitions to create so-called discrete 'premises' is contrary to the legislative scheme." Thereafter, the General Assembly promulgated Regulation 117-190 which became effective June 23, 1995. Regulation 117-190 currently defines "single place or premises" for purposes of interpreting the Video Game Machines Act, as follows:

The Video Game Machines Act, found in Article 20, Chapter 21 of Title 12, limits the number of machines that may be located in a "single place" or "premises."

A single place or premises must be a fixed location. It does not include moving property such as a boat or a train, unless such property is permanently affixed to a specific location.

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 firewalls 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 firewalls 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 have at least one 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 a separate state sales tax license? 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.

The proposed amended Regulation would include the above language, with the following additional provisions relating to "single place or premises":

Each single place or premises shall have at least one door opening to the exterior of the structure in which it is located. No single place or premises may at any time have a door, window, or any entry way open to another place or premises or to a common interior area adjoining any other place or premises, except for bona fide fire and emergency exits. Such fire and emergency exits are not to be opened except in fire and emergency situations.

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This regulation shall be construed and applied in such a way as to prohibit casino-style operations at locations in which video games are licensed.

The Department submitted in the State Register that the purpose of the proposed amendment to Regulation 117-190 is to insure that "no more than five video game machines are operating in a single place or premises." These changes would accomplish that purpose by making "commons areas" unlawful thereby eliminating "video malls." The Department's proposed amendment "would also limit retailers, such as convenience stores and bars, to five machines since it would prohibit a door or entry way to the single place or premises from a common interior area." The Department contends that these businesses violate the intent of the Video Game Machines Act against having more than five machines in a "single place or premises."

However, following the promulgation of the existing Regulation 117-190, the Department adopted Revenue Ruling #95-7, which sets forth in detail how to construct an approved video mall or a "mall type setting"-- buildings with a single point of ingress/egress to a centrally located common area shared by two or more video game rooms. Additionally, the Department expressly approved the blueprint designs of numerous "video malls" before the structures were constructed. Many video gaming businesses either modified their existing businesses to meet these guidelines or constructed video mall structures in keeping with the Department's approved guidelines. The Department's proposed amendment to Regulation 117-190 would eliminate these "video malls."

In this case, the redefining of "single place or premises" is not based upon the Department's need to define an uncertain term in the statute. Obviously, the term has already been defined by the existing Regulation. The Department asserted at the public hearing that the definition of "single place or premises" as it currently exists in Regulation 117-190 has failed because it has allowed the "large scale gambling operations that the General Assembly attempted to prohibit [in the Video Gaming Act to] become an economic force in this State." Furthermore, the Department contends that the existing definition has spawned numerous violations. The Department asserts it is expending a great deal of its resources litigating these infractions. The Department believes that by eliminating "video malls" and retailers with more than five machines, the number of violations--and the subsequent litigation--will be significantly reduced.

The opponents of the proposed regulation assert that the amendment is unreasonable because:

a. The grant of rulemaking authority to the Department in S.C. Code Ann. § 12-21-2798 (Supp. 1996) was so broad that it constitutes an impermissible delegation of authority to the Department.

b. The Department should be estopped from the submission of this regulation because the video poker industry has detrimentally relied upon the existing regulation and the Department's express approval of "video malls."

c. Once the Department defined "single place or premises," that definition became part of the statute; therefore, only the legislature can repeal the existing regulation.

d. Redefining the definition of "single place or premises" is an unconstitutional taking of their property.

8. I find that the previous findings of fact made in Department of Revenue v. Video Gaming Consultants, Inc., Docket No. 96-ALJ-17-0088-CC are relevant for consideration in this report. See, Freeman v. McBee, 280 S.C. 490, 313 S.E.2d 325 (Ct. App. 1984) ("A court can take judicial notice of its own records, files, and proceedings for all proper purposes including facts established in its records").

a. Dr. Valerie P. Loranz is Executive Director of the Compulsive Gambling Center in Baltimore, Maryland. Dr. Loranz earned a Masters degree from Penn State in Community Psychology. She wrote her dissertation on compulsive gambling. She earned a Doctorate degree from the University of Pennsylvania. Again, her dissertation topic was compulsive gambling. . . . Dr. Loranz was qualified as an expert in the area of the diagnosis and treatment of pathological gambling, the impact of gambling on society in general, and the relationship between gambling and crime.

b. Dr. William Norman Thompson is a professor of Public Administration at the University of Nevada, Las Vegas. Over the past ten years, Dr. Thompson has been a consultant for a panoply of gambling organizations. He has written approximately 100 articles on gambling and four published books. Dr. Thompson was qualified as an expert in the general area of gambling and specifically in the area of the economic impact of gambling upon society.

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c. Based on the testimony of Drs. Loranz and Thompson . . . , I find the following attributes exist concerning gambling in society. Pathological gambling, the clinical term used to describe compulsive gamblers, is a very disruptive illness that occurs in some individuals who choose to gamble. The increase of the legalization of various forms of gambling increases the occurrence of pathological gambling in society. Various direct and indirect economic and social costs accompany pathological gambling, including crime, loss of productivity, broken homes, bankruptcy, etc. In fact, pathological gambling affects the entire society, in the work environment and the family environment. Specifically, there is a strong relationship between compulsive gambling and crime. Money is the substance of the pathological gambling addiction. Once the compulsive gambler exhausts all legal access to money, he routinely commits crimes to get money. Thus the greater the prevalence of gambling, the greater the prevalence of crime. Consequently, the reduction of gambling reduces the potential for pathological gambling, and the resulting amount of social harm.

9. The Department also seeks to amend Regulation 117.190 to add the following provision:

In order to ensure that no casino or casino-style operations are allowed to operate, no single place or premises may be made to appear from its exterior, by means of signage or otherwise, to be a joint operation with any other single place or premises which is adjacent to or within 50 feet of another single place or premises.

The Department set forth in the State Register that the purpose of this proposed amendment is also to insure that "no more than five video game machines are operating in a single place or premises." This amendment would accomplish that purpose by eliminating the video game machine businesses known as the "strip shopping center concept" in which many "single places or premises" are placed side-by-side in a shopping center-type structure, with each video game room having a single sign advertising the location. However, though this amendment appears only to restrict the advertising of video game machine businesses in strip shopping centers, the Department's witness testified that the amendment prohibits any "single place or premises" from being located within fifty feet of another "single place or premises." The Department contends that these businesses violate the intent of the Video Game Machines Act against having more than five machines in a "single place or premises."

The opponents to the proposed regulation assert that the regulation is unreasonable because:

a. The Department has no authority to regulate signs.

b. The Proposed regulation is too vague.

c. The Proposed regulation is an impermissible restriction upon commercial speech.

d. The Department's interpretation of the application of the proposed regulation is not supported by the language of the regulation.

10. The Department proposes that the amendment to Regulation 117-190 eliminating "video malls" will not have a substantial economic impact upon the State because the number of Class III video poker machines as a result of its implementation will not be reduced, but will simply be relocated. In other words, there will be an equivalent number of new, freestanding game rooms opened to accommodate the machines reduced as a result of the elimination of "video malls."⁽¹⁾ Furthermore, the employees who lose jobs as a result of this amendment will find employment in other sectors of the "State's economy." The Department did not present an expert witness to support its assertion. However, the Department contends that the fact that the number of video game machines remained fairly constant, even during the period that twelve counties voted not to have video game machines in their jurisdictions, proves there would be no significant change as a result of the proposed regulation.

Dr. Randolph Martin⁽²⁾ testified in opposition to the proposed regulation. Both Dr. Martin and the Department's witness agreed that many of the "video malls" are located on the border of this State or adjacent to major highways; many of the dollars received by the video poker industry come from out-of- state tourists; and the "video mall" locations are more attractive to tourists. Dr. Martin also testified that the video malls are located in high demand areas and in fact increase the demand for gambling. Additionally, since many of the "video malls" are located in high unemployment areas, most of the workers who lose their jobs as a result of the proposed regulation would have difficulty finding employment. Finally, Dr. Martin found that because of the difficulty in maintaining a profitable revenue stream with locations that house only five machines, there will not be an equivalent number of new freestanding game rooms open to accommodate the machines reduced as a result of the elimination of "video malls."

Dr. Martin concluded that for the above reasons there could be a significant economic impact as a result of the proposed regulation. He states this impact would be in both the loss of jobs and the decrease in revenue accruing to the State. To the contrary, the jobs in the video poker industry are low wage jobs. Additionally, the money spent in these video malls by South Carolinians would presumably be available to spend on other aspects of the State's economy.

The fact that the number of machines did not significantly decline after twelve counties prohibited video poker can be explained by other factors. It is conceivable that the number of machines may have risen significantly if the twelve counties had not prohibited video poker. The Department simply offered no expert testimony to explain the potential variables concerning the production of these statistics. Moreover, there are approximately 500 "video malls" in this State that house the majority of the 28,000 video machine licenses. Even if the number of video poker machines did not decline significantly after the machines were prohibited in twelve counties, that evidence does not sufficiently establish, without further study, that the elimination of "video malls," the structures that house over half of the video game machines in this State, will not have a substantial economic impact. For example, if one fourth (or 3,500) of the approximately 14,000 machines located in "video malls" are not relicensed as a result of the proposed regulation, it would reduce State revenues by $7 million annually from the loss of license fees alone. Therefore, I find that the proposed regulation potentially poses a substantial impact upon the State's economy.

1. 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 Bd. for Contractors, 272 S.C. 211, 251 S.E.2d 186 (1978). To the contrary, "[a]lthough a regulation has the force of law, it 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 (1984).

2. The Opponents of the proposed regulation contend that the broad grant of authority in S.C. Code Ann. § 12-21-2798 to the Department to promulgate rules and regulations is an unlawful delegation of authority. In Banks v. Batesburg Hauling Co., 202 S.C. 273, 24 S.E.2d 496, 498 (1943)(quoting 16 C.J.S., Constitutional Law, § 138 p. 352) the Court held that:

While the Legislature may not delegate its power to make laws, it may vest in administrative officers and bodies a large measure of discretionary authority, especially to make rules and regulations relating to the enforcement of the law.

To that end, when the General Assembly enacted the Highway Advertising Control Act, S.C. Code Ann. § 57-25-110 et seq. (Law. Co-op. 1976), it included a provision authorizing the promulgation of regulations related to outdoor signs. That provision provided that, "[t]he Highways and Public Transportation Commission shall promulgate regulations governing the issuance of permits which must include mandatory maintenance to ensure that all signs are always in a good state of repair." S.C. Code Ann. § 57-25-150(D) (Law. Co-op. 1976). Pursuant to that statutory authorization the Highway Commission, later the Highway Department, promulgated a regulation related to outdoor advertising that was challenged in Young v. South Carolina Dept. of Highways and Public Transp., 287 S.C. 108, 336 S.E.2d 879 (Ct. App. 1985). The Court upheld the Highway Department's regulation which defined the term"transient or temporary," holding that:

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 by 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 "[t]he commission shall promulgate rules and regulations pertaining to the machines and persons licensed by it." I find that the above provision is not an unlawful delegation of authority. Therefore, the Department is properly authorized to promulgate a regulation defining the phrase "single place or premises."

3. The Opponents of the proposed regulation alleged that the proposed amendment would constitute a "taking" of the video mall owners' property. "The police power of the State rests upon the fundamental premise that every citizen must use his property so as not to wrong or injure others." Carter v. South Carolina Coastal Council, 281 S.C. 201, 314 S.E.2d 327, 329 (1984). To establish a regulatory taking by the State, the property owner must prove two elements: (1) "that the regulation has in substance 'taken' his property;" and (2) "that any proffered compensation was not 'just.'" Moore v. Sumter County Council, 300 S.C. 270, 387 S.E.2d 455, 456-457 ( 1990). In Lucas v. South Carolina Coastal Council, 309 S.C. 424, 424 S.E.2d 484 (1992) the Court held that a compensable taking occurs only when the property is deprived of "all economically beneficial use." Here, the regulation will prohibit the properties from being used as "video malls," but does not deprive the properties of all possible economic use. The properties would be deprived of only one "economically beneficial use" and could be used for a wide variety of other commercial enterprises.

4. The Opponents contend that the State should be estopped from redefining a "single place or premises." They argue that the video poker industry has spent large sums of money constructing "video malls" not only in reliance upon the existing Regulation, but also in reliance upon the Department's actions in specifically approving the construction and operation of "video malls." "Regulations and restrictions upon the manner in which a property owner may use his property when necessary for the general welfare are properly a part of the police power of legislative bodies and, if reasonable, are valid in so far as they tend to prevent harm to the public and to promote the common good." Richards v. City of Columbia, 227 S.C. 538, 88 S.E.2d 683, 687 ( 1955). The Court further recognized in Richards that the State, in exercising its police power, "may require reasonable changes in buildings previously erected, in order to comply with new requirements and standards for the protection of health and safety, despite the fact that such buildings, at the time of erection, complied with the regulations then in effect." Richards, 88 S.E.2d 683 at 689. Furthermore, the Department redefining the term "single place or premises" also conforms with the U.S. Supreme Court's decision in Helvering v. Wilshire Oil Co., 308 U.S. 90 (1939). In Helvering, the Court refused to overturn an internal revenue regulation that changed the availability of certain deductions, even though the Respondent detrimentally relied on the prior regulation that allowed the deduction. State agencies are given broad power to define and interpret statutes, and in some cases, a definition is found wanting because of inconsistencies or ambiguities. It would be unnecessarily restrictive to force state agencies to live with ambiguous regulations in perpetuity, which fly in the face of the law's need to evolve and change with the times. Following the reasoning of the Courts' decisions in Richards and Helvering, the General Assembly may change a regulation in a way that will affect the rights of property owners, even if the owners were in compliance with an earlier regulation. Such a change falls within the police powers of the state, and would not give rise to an estoppel argument. Thus, even though the video mall owners constructed their buildings in accordance with the earlier regulation, they ran the risk that the regulation might be amended at a later time.

5. "Reasonable" is defined as "Fair, proper, just, moderate, suitable under the circumstances. . . . Not immoderate or excessive, being synonymous with rational, honest, equitable, fair, suitable, moderate, tolerable." Black's Law Dictionary, 1265 (6th ed. 1990). The word has been further defined to mean "agreeable to reason under the facts and circumstances of the case before the Court." Ellis v. Taylor, 311 S.C. 66, 427 S.E.2d 678 (Ct. App. 1992). The definitions are broad and leave a wide discretion to the judge in interpreting the reasonableness of a proposed regulation.

As stated above, the proposed Regulation's provision redefining a "single place or premises" is lawful. Furthermore, the proposed Regulation is a reasonable definition of a "single place or premises." However, though the Department may lawfully change its regulatory definitions, the proposed regulation does not provide for a phase-in period. Therefore, video mall owners would be forced to comply with the new regulation immediately upon enactment. I find that an immediate implementation of the provision in Regulation 117-190 eliminating the very "video malls" that the Department has explicitly approved would be unreasonable unless the proposed regulation is modified to allow for a phase-in period.

6. The Department's proposed amendment concerning the joint advertising video poker locations transforms advertising violations under the Video Game Machines Act into "single place or premises" violations, subject to the penalty provisions of § 12-21-2804(A), despite the fact that § 12-21-2804(B) and (F) already set forth the penalties for advertising violations. An attempt to impose penalties through a regulation that differs from the express penalties set forth in the controlling statute constitutes an impermissible material alteration of that statute. Society of Professional Journalists v. Sexton, 283 S.C. 563, 324 S.E.2d 313 (1984). Therefore, the amended provisions concerning the advertising of video poker should be properly codified under Regulation 117-190.2.

Moreover, the provision of the proposed regulation setting forth that "no single place or premises may be made to appear from its exterior, by means of signage or otherwise, to be a joint operation with any other single place or premises which is adjacent to or within 50 feet of another single place or premises" (emphasis added) is unreasonable as drafted. The Department's witnesses testified that the amendment will serve to prohibit any "single place or premises" from being located within fifty feet of another "single place or premises." While this may be the intended purpose of the amendment, that purpose is not apparent in the language of the amendment. Therefore, if the Department seeks to prohibit video poker locations from being within fifty feet of another "single place or premises," the regulation should be redrafted to provide a more explicit statement of the purpose and reasons for that amendment.

7. What do the citizens of South Carolina need, and specifically what does the Department need, on behalf of the State of South Carolina? A simple answer to any question concerning video poker is that the State does not need legalized gambling to function as a State. There is no fundamental right to gamble protected by the Federal Constitution. Lewis v. United States, 348 U.S. 419 (1955). In fact, but for the authorization of gambling upon video poker machines by the General Assembly, the payout for the winnings upon these machines would be illegal. S.C. Code Ann. §§ 16-19-40 and 60 (1985 and Supp. 1996). Therefore, any restriction placed upon this very institution by the State could be sanctioned as needed. However, though the State does not need video poker in the traditional sense of the word "need," its authorization of the Video Gaming Act has indicated a desire or intention for the State to have this institution.

If this State's authorization of video poker is founded in the need to raise revenue then the regulation proposed by the Department may adversely impact the raising of that revenue. The idea that the Video Game Machines Act was promulgated to raise revenue is founded in S.C. Code Ann. § 12-21-2720(A)(3) (Supp. 1996), which currently imposes a Four Thousand ($4,000.00) Dollar license tax for each video machine every two years. The money from these license taxes constitutes a significant amount of revenue for the State, especially when the amount of the tax is compared with other video game and coin-operated machine license fees. In addition, S.C. Code Ann. § 12-21-2776(B) (Supp. 1996), requires that every machine must be equipped with metering devices that monitor and report the cash flow for each machine. The statute also requires that owners or operators must file quarterly reports with the Department that gives information on income, payouts, gross profits, and the amount of profit split between owners and operators. These requirements express a legislative intent to compel accurate reporting of income for purposes of taxation. Therefore, one may conclude that the Video Game Machines Act fulfills a need, or at least a secondary need, to raise revenue for the State. That purpose could be adversely affected by the Department's proposed regulation.

To the contrary, if the intention of the Video Game Machines Act is to create a carefully regulated gambling industry that seeks to thwart the development of large scale, casino-type gambling in South Carolina, then this amended regulation is reasonable and needed to accomplish that purpose. The legislative intent to control gambling in South Carolina is grounded in several key provisions of the Video Game Machines Act. First, the General Assembly directed that only a limited number of gambling machines could be situated at a "single place or premises." § 12-21-2804(A). Second, the Act also prohibited advertising of these gambling machines. § 12-21-2804(B). Finally, the General Assembly required that a business's gambling operations not provide its principal source of revenue. §12-21-2804(A). While this last provision was held to be unconstitutional in Reyelt, supra, it nevertheless evinces an intent on the part of the legislature to discourage large scale gambling operations in the State. See, 1994 Op. S.C. Att'y Gen. No. 51. On that basis, there is logical evidence suggesting that the Act's intent is to discourage and strictly regulate casino-style gambling in South Carolina.

In the final analysis, the question of the need of this regulation must be answered by the legislative determination as to why South Carolina needs video poker.

S.C. Code Ann. § 1-23-111(B) (Supp. 1996) calls for a written report by the presiding administrative law judge that includes "findings as to the need and reasonableness of the proposed regulation based on an analysis of the factors listed in Section 1-23-115(C) . . . , and other factors as the presiding official identifies and may include suggested modifications to the proposed regulation in the case of a finding of lack of need or reasonableness." In essence, the public hearing serves to edify the agency as to potential problems with the regulation, in the hope that the agency will seek to modify the regulation accordingly. To that end, S.C. Code Ann. § 1-23-111(C) (Supp. 1995), provides that if the presiding administrative law judge determines that the need for or reasonableness of the proposed regulation has not been established, the agency must elect to:

(a) follow the suggested modifications of the administrative law

judge and submit the modified proposal for legislative approval;

(b) not modify the proposed regulation but submit the proposed regulation as originally drafted for legislative approval;

(c) withdraw the proposed regulation.

Based upon the above Findings and Conclusion, I recommend that the proposed regulation should be modified by the Department prior to submission to the General Assembly as follows:

1. In order to comport with fundamental notions of fairness and equity, the regulation should not take effect immediately, but should follow the example set by the legislature in enacting § 12-21-2804(A), which granted a one-year period for all businesses to merely reduce the number of machines on the premises from eight to five. Therefore, the proposed regulation, which will eliminate "video malls," should give the affected businesses three years to come into compliance after its promulgation.

2. The regulation needs to provide a definition for "common area" that clarifies what kinds of spaces are prohibited. A suggested definition is:

"Common area" includes any space, either fully or partially enclosed by walls, that allows a person to move from one business to the next business without having to leave the enclosed area or travel through publicly accessible outdoor areas. Such structures shall include, but not be limited to: hallways, corridors, courtyards - both open-air and enclosed, atriums, and lobbies.

3. The regulation's restrictions on advertising should be recodified under Regulation 117-190.2 and redrafted. A suggested redraft is as follows:

In order to ensure that no casino or casino-style operations are allowed to operate, a single place or premises may use exterior advertising only for the promotion of the individual business and may not make representations to the general public that the business is participating in joint operations with adjacent or neighboring single places or premises.

The regulation should also provide a definition for "casino style operations" that would assist enforcement agents in determining what types of operations are prohibited. A suggested definition is:

"Casino style operations" are businesses linked by a common area, where more than five patrons may simultaneously play machines regulated under the Video Game Machines Act.

Columbia, South Carolina

July 8, 1997

1. This assertion creates a logical dilemma. If the purpose of this regulation is to reduce large scale gambling in South Carolina, which the Department contends currently exists as a result of these "video malls," what purpose is actually accomplished if the number of machines, and therefore the availability of gambling, is not reduced?

2. Dr. Martin was qualified as an expert witness in the area of economics. He has been on the faculty of the School of Economics with the University of South Carolina for twenty seven (27) years and a full professor for sixteen (16) years. He has further prepared numerous studies concerning the economic impact of proposed governmental activity.