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. AAA Entertainment Corp., Le Cabaret, Inc. and Wendy E. Spahn

AGENCY:
South Carolina Department of Revenue

PARTIES:
Petitioners:
South Carolina Department of Revenue

Respondents:
AAA Entertainment Corp., Le Cabaret, Inc. and Wendy E. Spahn
 
DOCKET NUMBER:
98-ALJ-17-0615-CC

APPEARANCES:
Petitioners & Representative: South Carolina Department of Revenue, Jeffrey M. Nelson

Respondents & Representative: AAA Entertainment Corp., Le Cabaret, Inc., Wendy E. Spahn, H. Fred Kuhn

Parties Present: All parties present
 

ORDERS:

FINAL ORDER AND DECISION

I. Statement of the Case



The South Carolina Department of Revenue (DOR) seeks revocation of thirteen Class III video poker licenses(1) and a $5,000 fine against each of the machine owners and location owners for a failure to have an employee on the premises of each game room.(2) AAA Entertainment Corp. (AAA) as the machine owner and Le Cabaret, Inc. (Le Cabaret) and Wendy Spahn (Spahn) as location owners oppose DOR's position and seek the dismissal of the administrative violations. This disagreement places jurisdiction in the Administrative Law Judge Division. S.C. Code Ann. §§ 12-60-1310, 12-60-1320, 1-23-600 (Supp. 1998). The hearing in this matter was held February 25, 1999, at the Edgar Brown Building, Columbia, South Carolina. Based upon the evidence and the arguments presented by the parties, a violation of §12-21-2804(A) occurred on July 25, 1995 at the video gaming businesses located at 13 Heritage Plaza, Hilton Head, South Carolina and requires that the licenses for the thirteen machines in the two rooms be revoked. Further, under S.C. Code Ann. § 12-21-2804(F), for violating § 12-21-2804(A), a fine of $4,000 is imposed upon Le Cabaret and Spahn each and a $2,000 fine on AAA. In addition, under §12-21-2720(C), AAA must pay licensee fees of $3,000 for each of the four unlicensed stations for a total license fee due of $12,000. Finally, AAA, under S.C. Code Ann § 12-21-2738, must pay a fine of $2,500 for each of its four failures to attach a license, for a total of $10,000.



II. Issues



1. Did AAA Entertainment, Le Cabaret, or Spahn violate the single place or premises requirement of S.C. Code Ann. § 12-21-2804(A) (Supp. 1998) and 27 S.C. Code Ann. Regs. 117-190 (Supp. 1998) by failing to have at least one separate employee on the premises during business hours?



2. If a violation of the single place or premises requirement occurred, is AAA Entertainment (the machine owner) not liable for a penalty due to having no involvement in the management affairs of the location?



3. If a violation of the single place or premises requirement occurred, what monetary penalty, if any, is proper for AAA Entertainment, Le Cabaret, and Spahn?



4. Does South Carolina Dept. of Revenue & Taxation v. Rosemary Coin Machines, Inc. 331 S.C. 234, 500 S.E.2d 176 (Ct. App. 1998) require obtaining multiple licenses for a five player machine?



5. If a violation of the multiplayer license requirement occurred, what is the penalty?



III. Analysis



A. Single Place or Premises: Employee On Premises



1. Positions of Parties



DOR asserts only one employee was in the building during the inspection by DOR. Further, DOR asserts the single employee was assigned to cover two gaming rooms. Finally, DOR asserts the employee was not physically present in either of the two gaming rooms, but instead, the employee remained in the common area during the inspection. AAA Entertainment, Le Cabaret, and Spahn disagree and argue no violation occurred.



2. Findings of Fact



Based on the preponderance of the evidence, the following findings of fact are entered:



A. Background Facts



AAA Entertainment holds several licenses for Class III video game machines with nine of those licenses utilized at 13 Heritage Plaza, Hilton Head, South Carolina. The building at the Hilton Head address contains a video game business in a mall-type structure housing two video game rooms. Le Cabaret holds a retail sales tax license for one of the video game rooms, and Spahn holds a retail sales tax license for the other video game room. The game rooms have the following names and house the following machines:



Heritage Plaza Driftwood 40558, 40561, 40562, 40564, 40572

Le Cabaret 40559, 40560, 40563, 40565



License number 40560 is a single license for a Blackjack machine that has five stations.

On July 25, 1995, DOR conducted an inspection of the video game businesses at the Hilton Head address. The inspection included walking into each area, listing the license numbers for machines located in the two game rooms, taking photographs of the location, examining the business licenses, retail tax licenses, and talking to an employee at the location.



As a result of the inspection, the SLED Agents issued a citation against AAA, Le Cabaret, and Spahn for violation of S.C. Code Ann. § 12-21-2804(A) and 27 S.C. Code Ann. Regs. 117-190 (Supp. 1998) for operation of more than five machines in a single place or premises. Copies of the Violation Report were left with the employee on duty. In addition to revocation, DOR also seeks a $5,000 fine against AAA Entertainment as the owner and licensee of the machines and a $5,000 fine each against Le Cabaret and Spahn as the operators of the location.



B. Disputed Facts



This dispute asks whether AAA Entertainment, Le Cabaret, and Spahn had at the time of the inspection at least one separate employee on the premises of each of the game rooms during business hours. The evidence establishes that at the time of the inspection, no employee was in Heritage Plaza Driftwood or Le Cabaret. Further, the evidence establishes that both rooms were open to customers. None of the rooms gave any appearance of being closed, and one employee was in the building in the capacity of being available to assist customers. In fact, the evidence establishes that at the time of the inspection the single employee was assigned to cover two rooms since another employee had left the building. Further, the evidence confirms that the employee remained in the commons area during the time of the inspection and did not enter the game rooms during the inspection.



3. Conclusions of Law



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



A. Statutory and Regulatory Requirements for Single Place or Premises



For machines authorized under § 12-21-2720(A)(3), i.e. Class III machines, no person may maintain licenses or permits for more than five Class III machines at a single place or premises. S.C. Code Ann. § 12-21-2804 (Supp. 1998). The statute does not explain what constitutes a single place or premises. A definition is supplied, however, by Regulation 117-190.



Regulation 117-190 concentrates its analysis of a single place or premises by examining the physical characteristics of the structure enclosing the Class III machines and gives particular attention to exterior walls surrounding two or more video game areas. If at least two interior structures exist (i.e., each having a proper four wall configuration) and if Class III video games are located within each interior structure, then each interior structure is a video game area. Under such circumstances the inquiry becomes whether each video game area is a single place or premises allowing five machines within each area.



A decision on whether each video game area is a single place or premises is reached by a facts and circumstances methodology imposed by Regs. 117-190. Under the regulation, DOR "must review all the facts and circumstances to determine if each area in reality constitutes a single place or premise for video game machines." While a facts and circumstances review is normally very general, the regulation requires the existence of at least four specific facts. Indeed, a failure to meet any one of the four criteria results in the video game area not being a separate place or premises. The four criteria 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 a separate state sales tax license?



B. Law Addressing Employee on the Premises



The issue in dispute in this case is criteria (2): Does each entity or business have at least one separate employee on the premises during business hours? DOR asserts that both game rooms at the Hilton Head location were without separate employees on the premises as required by Regs. 117-190. However, in deciding this issue, a difference of opinion exists on whether the employee must be within the four walls of the area in question in order to meet the "on the premises" requirement.



One view is that an employee is not considered to be "on the premises" when the employee is working outside the game room and the Class III video game machines are operational and accessible to customers; i.e., an employee must be present in the room. (The four-walls position.) S.C. Dep't of Revenue and Taxation v. Mickey Stacks, 95-ALJ-17-0742-CC (March 8, 1996). A contrary view is that the requirement is met even if the employee is outside the four walls so long as the employee's physical position enables the employee to observe the room and the employee is performing his job functions at the employee's location. (The within-view-of-the-four-walls position). South Carolina Department of Revenue v. Great Games, Inc., Docket No. 96-ALJ-17-0204-CC, (January 22, 1997). In a similar vein, a view exists that an employee's absence from the room is permissible if the absence is for a short period and the absence is for a justifiable reason, e.g., personal physical needs. (The short-legitimate-absence position). DOR v. Ace Music Company of Spartanburg, Inc., 97-ALJ-17-0309-CC (October 19, 1997).



I agree with the four-walls position and respectfully disagree with both the within-view-of-the-four-walls position and the short-legitimate-absence position. While at first blush it may seem reasonable to provide exceptions to the four-walls rule, closer analysis dictates otherwise.



First, relying upon the rules of statutory construction to justify exceptions to the plain language is unwarranted. The language "on the premises" is not ambiguous and must be taken in its literal and ordinary meaning. Lail v. Richland Wrecking Company, Inc., 280 S.C. 532, 313 S.E.2d 342 (Ct. App. 1984). To employ the rules of statutory construction to find that "on the premises" allows an employee to be "away from the premises" violates the principle that the rules of statutory construction are provided to remove doubt but never to create doubt. See 73 Am Jur 2d Statutes § 146, citing Englewood Water Dist. v. Tate, 334 So 2d 626 (Fla. App. 1976).



Here, the language of the statute and the regulation is clear. The statute and regulation allow no more than five machines in a single place or premises. Where, as is the case in this matter, at least two interior structures exist with machines inside those structures, each interior structure is a "video game area." None of the video game areas can acquire the status of a separate single place or premises unless an employee is "on the premises during business hours." The premises, upon which the employee must be "on," is the space identified as the "video game area." An employee cannot be on the premises of an identified space if the employee is physically someplace else. Accordingly, once the employee physically leaves the space of the video game area, the employee is no longer "on the premises."



Second, a court can not seek ways to rewrite statutes or regulations. To depart from the plainly expressed meaning causes the tribunal to legislate rather than interpret since "[t]he responsibility for the justice or wisdom of legislation rests with the Legislature, and it is the province of the courts to construe, not to make, the laws." Creech v. South Carolina Pub. Serv. Auth., 200 S.C. 127, 146, 20 S.E.2d 645, 652 (1942) (superseded on other grounds by S.C. Code Ann. § 5-7-30). In short, an ALJ cannot add conditions to the "on the premises" language of the regulation in an effort to provide exceptions that seek to improve upon what the General Assembly has plainly promulgated.



Finally, the purpose of the regulation under review dictates a holding that "on the premises" means exactly what it says. The purpose of the regulation is to provide a high degree of certainty to defining a separate place or premises. The very reason for the promulgation is that no statutory definition was provided.



In accordance with the purpose sought, the regulation adopts site specific criteria. Indeed, the regulation counts walls, limits openings in the walls, prevents access from one area to another, and even details that the walls must be one-hour firewalls. Given the regulations's site specific analysis, the most consistent view is that the plain language of "on the premises" limits the employee to the physical space of the four walls. On the contrary, inconsistency with the regulation results if "on the premises" requires examining whether the employee's line of sight covers more than one area or whether the reason the employee is away is a proper reason. In short, the regulation is site specific and requires that "on the premises" be within the four walls of the area under review.



C. Law Applied to Facts



In proving that no separate employee was on each of the premises, DOR bears the burden of proof. See 2 Am. Jur. 2d Administrative Law § 360 (1994) (burden of proof generally rests with the party who asserts the affirmative of an issue). Under the facts of this case, DOR has met that burden.



Here, at the time of the inspection, no employee was in Heritage Plaza Driftwood or Le Cabaret. Further, the rooms were open to customers and none of the rooms gave any appearance of being closed. Only one employee was in the building and that employee was there in the capacity of being available to assist customers. In fact, the evidence establishes that at the time of the inspection that single employee was assigned to cover two rooms since another employee had left the building. Further, the evidence confirms that the employee remained in the commons area during the time of the inspection and did not enter the game rooms during the inspection. Accordingly, for two reasons, a violation of §12-21-2804(A) occurred on July 25, 1995 at the video gaming businesses located at 13 Heritage Plaza, Hilton Head, South Carolina. First, a violation occurred since no employee was physically present in either of the two game rooms. Second, a violation occurred since a separate employee must be assigned to each room. Here one employee was assigned to cover two rooms. Thus, the licenses for the two rooms are revoked.



B. Applicability of Penalty to Machine Owner



1. Positions of Parties



DOR asserts that a fine of $5,000 is due from AAA Entertainment, as the holder of the machine licenses. AAA Entertainment argues it is not liable for a penalty since as a machine owner it had no part in violating the single place or premises requirement. In response to AAA Entertainment's argument, DOR asserts that a violation of S.C. Code Ann. § 12-21-2804 has been established and that a fine is imposed on the license holder. Further, the fine is not dependent upon a showing that knowledge of the violation was present in AAA Entertainment.



2. Findings of Fact



Based on the preponderance of the evidence, the following findings of fact are entered:



No dispute exists that AAA Entertainment has no management control of any employee working for the game rooms involved in this case. Rather, the day-to-day management control over employees at the two game rooms was totally outside AAA Entertainment and was in Le Cabaret and Spahn. However, despite a lack of daily control, AAA Entertainment shared profits and losses with the location operator. Accordingly, control of the licenses to the Class III machines is in AAA Entertainment.



3. Conclusions of Law



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



A violation of section 12-21-2804(A) results in the imposition of a fine. S.C. Code Ann. § 12-21-2804(F) (Supp. 1998). The pertinent question: a fine against whom?



A. Persons Liable



The person liable for the fine is the "person violating" section 12-21-2804(A). S.C. Code Ann. § 12-21-2804(F) (Supp. 1998). For periods beginning after July 1, 1994 (obviously the case in this matter), the person violating § 12-21-2804(A) is the one who "maintain[s] any licenses or permits for more than five machines authorized under Section 12-21-2720(A)(3) at a single place or premises."(3) S.C. Code Ann. § 12-21-2804(A) (Supp. 1998). Persons maintain licenses for more than five machines if they "continue or preserve in or with; to carry on." Black's Law Dictionary 953 (6th ed. 1990); See also Merriam-Webster OnLine Dictionary, 1999 ("maintain" means "to continue or persevere in: carry on, keep up" or "to support or provide for.").(4)



Who carries on the license in this case? AAA Entertainment, Le Cabaret, and Spahn all maintain the licenses for the machines owned by AAA Entertainment. The joint "maintaining" is evident from the parties' agreement to share in the profits or losses produced by the license. AAA Entertainment maintains and carries on the licenses by, not insignificantly, providing the very license needed to operate the machines.



Likewise, Le Cabaret and Spahn maintain the licenses as well. They maintain the licenses by sharing in the profits and losses from the license as well as providing the operational environment for the machines: housing, seating and equipment for customers, required employees, adequate parking, etc. Accordingly, AAA Entertainment, Le Cabaret, and Spahn maintain the licenses on the Class III machines. As such, AAA Entertainment, as one of the maintainers of the licenses, is liable for a fine. S.C. Code Ann. § 12-21-2804(F) (Supp. 1998).



B. Lack of Knowledge



For two reasons, the fact that AAA Entertainment had no day-to-day control over the employees at the location does not remove the imposition of a fine. First, the General Assembly did not impose a duty of finding the violator had any degree of intention such as "knowingly," "intentionally" or "willfully." Instead of an intention to violate the law, all the statute demands is proof that a license is being maintained for more than five machines at a single place or premises. In fact, the General Assembly has demonstrated that when it wanted to impose guilty knowledge as a part of a violation it did so by specific language. See S.C. Code Ann. §12-21-2804(F) (upon a determination that a violation is wilful, criminal prosecution may be pursued). Second, since the statutory language does not impose knowledge as a requirement, none can be added. Accordingly, lack of knowledge or intention does not halt the imposition of a fine against AAA Entertainment.



C. Amount of Penalty



1. Positions of Parties



DOR asserts that a fine of $5,000 is due from AAA Entertainment as the holder of the machine licenses, and that $5,000 is due from Le Cabaret as the location operator and $5,000 is due from Spahn also as a location operator. AAA Entertainment, Le Cabaret, and Spahn argue the penalty is too severe.



2. Findings of Fact



Based on the preponderance of the evidence, the following findings of fact are entered:



Le Cabaret's and Spahn's policy is that an employee need not at all times be assigned to a single game room and that the employee need not be in the game room at all times. Consistent with the stated policy, at the time of inspection on July 25, 1995, no employee was present in either of the two game rooms and one employee was assigned to cover two rooms.



AAA Entertainment places the machines with Le Cabaret and Spahn and each share in the profits of the machines. Under this arrangement, management of the rooms in which the Class III machines are located is in Le Cabaret and Spahn. However, actual maintenance and control of the Class III machines is in AAA Entertainment. Thus, as to the operation of the machines, Le Cabaret and Spahn use the game rooms for their retail businesses and AAA Entertainment uses the game rooms for its ownership of the machines.



3. Conclusions of Law



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



A violation of section 12-21-2804(A) results in the imposition of a fine. S.C. Code Ann. § 12-21-2804(F) (Supp. 1998). In this case the persons liable for the fine are AAA Entertainment, Le Cabaret, and Spahn.



Where the General Assembly authorizes a range for an administratively-imposed penalty, the administrative adjudicator sitting as the fact-finder may set the amount of the penalty after a hearing on the dispute. Walker v. South Carolina ABC Comm'n, 305 S.C. 209, 407 S.E.2d 633 (1991). When penalty disputes are part of the factual issues for decision, the fact-finder must receive evidence and make a determination on all such factual disputes arising from the contested case. S.C. Code Ann. § 1-23-350 (Rev. 1986).



Here, the evidence establishes that Le Cabaret, Spahn, and AAA Entertainment have violated § 12-21-2804(A). Le Cabaret and Spahn have incorrectly interpreted the single place or premises requirement but appear not to have done so in a manner that intentionally disregards the mandates of the statute. Given the different views on what criteria satisfy the statute, a party's incorrect attempt to satisfy the statute is at least a mitigating factor warranting an imposition less than the maximum fine allowed by law. Thus, under all of the circumstances, a fine of $4,000 each is appropriate for Le Cabaret and Spahn. Further, a mitigating factor as to AAA Entertainment is that entity's lack of management control over employees. While such a lack of control is not a sufficient basis for avoiding the imposition of a fine, that lack of control does present a mitigating factor resulting in a reduced fine of $2,000 for AAA Entertainment.



D. Licenses for a Multiplayer Machine



1. Positions of Parties



DOR asserts that AAA Entertainment Corp. failed to procure licenses for four of the stations of a multi-station video machine. Based on such, DOR asserts a $3,000 licensing fee is due for each of the stations for a total license fee of $12,000. Both AAA Entertainment and Le Cabaret argue that a single license is all that is needed on the multiplayer machine. Thus, the $12,000 license fee is not required.



2. Findings of Fact



Based on the preponderance of the evidence, the following findings of fact are entered:





AAA Entertainment owns a Class III machine offering Blackjack and having stations for five players. The machine is located in the game room identified as Le Cabaret and has only one license. That single license was acquired for the five player machine prior to July 1, 1995. While the five stations were not being played at the time of the inspection, the five stations of the machine were available for play on that date and had been available for play at least since July 1, 1995. On July 1, 1995, S.C. Code Ann § 12-21-2720(C) became effective. DOR's inspection on July 25, 1995 concluded that the machine must have a license for each of the five stations. Thus, DOR imposed a license fee for the remaining four stations.



3. Conclusions of Law



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



A five station Class III machine offering Blackjack must have five licenses. S.C. Code Ann. 12-21-2720(C), as effective on July 1, 1995. AAA argues that a single license was all the law required at the time it acquired its license and that the amended statute requiring a license for each station can only apply to licenses acquired after the effective date of amendment, i.e. after July 1, 1995. Accordingly, AAA argues that on the inspection date of July 25, 1995, it was not subject to §12-21-2720(C), since it acquired its license before the amendment's effective date of July 1, 1995. I disagree with AAA.



South Carolina Department of Revenue and Taxation v. Rosemary Coin Machines, Inc. 331 S.C. 234, 500 S.E.2d 176 (Ct. App. 1998) holds that the amendment to 12-21-2720(C) was effective immediately and that on July 1, 1995 each station of a multiplayer machine was to be licensed. Accordingly, AAA was required to obtain licenses for each of the stations. Since the machines had been in use after July 1, 1995, and were available for play on the inspection date of July 25, 1995, DOR imposed upon AAA the duty to obtain the licenses consistent with the use being made of the machine. Thus, the license fees of $3,000 for each station is properly imposed for a total license fee due of $12,000.



E. Penalty for Violation of Licenses for a Multiplayer Machine



1. Positions of Parties



DOR asserts that a fine is due from AAA Entertainment since AAA had operated a five station machine since July 1, 1995 without the required five licenses. DOR asserts the penalty is calculated at $2,500 for each station for a total of $10,000. AAA Entertainment argues the penalty is too severe.



2. Findings of Fact



Based on the preponderance of the evidence, the following findings of fact are entered:



AAA did not have a license on each of the stations for the five player station Blackjack machine in the game room Le Cabaret. Rather, AAA had only one license for the machine.



3. Conclusions of Law



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



A person who fails to attach the required license to any machine as required by law is subject to a $2,500 penalty for each failure. S.C. Code Ann § 12-21-2738. The amount of the penalty is not discretionary since the statute explains that "the applicable penalty is two thousand five hundred dollars." Here, the licenses were not attached on the July 25, 1995 inspection date. Each station of the machine was required to have a license. Thus, each station without a license created a separate failure to attach a license. Accordingly, the fine of $2,500 must be imposed for each failure, resulting in a total fine of $10,000.



IV. Order



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



Since a violation of §12-21-2804(A) occurred on July 25, 1995 at the video gaming businesses located at 13 Heritage Plaza, Hilton Head, South Carolina, the licenses for the thirteen machines in the two rooms are revoked. Further, under S.C. Code Ann. § 12-21-2804(F), for violating § 12-21-2804(A), a fine of $4,000 is imposed upon Le Cabaret and Spahn each and a $2,000 fine on AAA. In addition, under §12-21-2720(C), AAA must pay licensee fees of $3,000 for each of the four unlicensed stations for a total license fee due of $12,000. Finally, AAA, under S.C. Code Ann § 12-21-2738, must pay a fine of $2,500 for each of its four failures to attach a license for a total of $10,000.



AND IT IS SO ORDERED.



RAY N. STEVENS

Administrative Law Judge



Dated: March 16, 1999

Columbia, South Carolina

1. Nine licenses were in use at the location involved in this matter. However, DOR asserts that as a matter of law thirteen licenses were required. Thus, DOR seeks to revoke the nine licenses in use, require the obtaining of four additional licenses, and revoke the additional four licenses as well.

2. DOR does not seek a prohibition on the use of Class III machines at the location for a six month period. Rather, DOR conceded that the location's character and configuration have changed significantly since the alleged violation occurred in 1995. Such change, DOR concedes, warrants abandoning the six month prohibition issue. Since DOR has chosen not to pursue the prohibition, that issue is not addressed in this order.

3. The actual language of the statute is that DOR may not "authorize to be maintained" any licenses or permits for more than five Class III machines at a single place or premises. Given such language, the clear intent is that if DOR is not authorized to allow one to maintain more than five licenses, then the person who improperly maintains the excess number of licenses is the person who violates the statute.

4. In arriving at the meaning of words used in a statute, the primary rule is to ascertain and give effect to the legislature's intent or purpose as expressed in the statute. Green v. Thornton, 265 S.C. 436, 219 S.E.2d 827 (1975). The legislature's intent should be ascertained primarily from the plain language of the statute. 82 C.J.S. Statutes § 322 (b), at 571 (1953). Unless the statute requires a different interpretation, the words used must be given their ordinary meaning. Hughes v. Edwards, 265 S.C. 529, 220 S.E.2d 231 (1975).


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