OAR 177-040-0061: Casino Prohibition

(1) General: The operation of a casino is constitutionally prohibited in the state of Oregon. It is the policy of the Oregon State Lottery to place Video Lottery terminals only in an establishment that does not operate as a casino. The purpose of this rule is to provide a framework and a process for determining when an establishment is operating or may operate as a casino. This framework and process are in addition to other methods the Oregon State Lottery uses to prevent Video Lottery retailers from operating an establishment as a casino. Other methods include, but are not limited to: (a) A limit on the number of Video Lottery terminals in any establishment; (b) Limiting public view of Video Lottery terminals; (c) A limitation on certain advertising and promotional activities by retailers; and (d) Considering the sale of Lottery tickets and shares by retailers an adjunct to their businesses. (2) Definitions: For purposes of this rule: (a) “Establishment” means any single location in which Video Lottery games are operated or which is identified in a Video Lottery Retailer Application as the proposed site for such activity. An establishment must be owned or operated by a person licensed to sell alcoholic beverages for consumption in a specific age-controlled area of the establishment. The final determination of what constitutes an establishment shall be made by the Director. (b) “Total Annual Lottery Compensation” means the actual, or in the case of an applicant, the reasonably projected total annual compensation received from the Lottery for the sale of all Lottery tickets and shares at the establishment over a selected twelve-month period, including, but not limited to, compensation resulting from participation in Lottery incentive and bonus programs, as described in the Retailer Contract, other than those programs awarding bonuses on the basis of the sale of winning and validated Scratch-it or On-Line tickets for which a prize of $10,000 or more is paid. (c) “Annual Non-Lottery Sales” means the actual, or in the case of an applicant, the reasonably projected revenue from the sale of products or services other than Lottery tickets and shares to retail customers at the establishment over a selected twelve-month period. Projected sales will only be deemed reasonable if they are based on a detailed business plan which is fact and evidence based or meets industry standards for business plans. Only the sale of products or services to retail customers in return for which the establishment receives cash or any instrument evidencing cash consideration shall be included in the calculation of annual non-Lottery sales. Examples of products and services not considered for annual non-Lottery sales for purposes of this rule include, but are not limited to: (A) The sale of products or services which are not usually sold by or associated with the type of retail establishment being reviewed. For example, the sale of a car by a tavern would not be included; (B) The wholesale sale of products. “Wholesale” means the sale of goods in quantity, as to retailers or jobbers, for resale to the public. This includes the sale or transfer of cigarettes or other products between two or more establishments operated by the same retailer; (C) The gifting of complimentary or promotional products; or the value of promotional discounts/coupons; (D) The retail sale of products or services sold or rendered outside of the establishment (such as catering) unless the work is substantially completed at the establishment and the services are provided substantially by employees of the establishment; (E) The sale of products or services for which the retailer receives a commission, except that the amount of the commission received may be considered; and (F) Income from other than the sale of a product or service (such as a cover charge) will not be included in the calculation of annual non-Lottery sales. (3) Director’s Casino Determination: The Director shall determine whether an establishment is operating or may operate as a casino before entering into a Video Lottery contract for that establishment. The Director may also initiate a review of an existing Video Lottery retailer whenever the Director has reason to believe that an establishment is operating as a casino, or may operate as a casino. The Director may rely on whatever resources and information are available in deciding to initiate a review of an existing Video Lottery retailer. A Video Lottery retailer, or person applying to become a Video Lottery retailer, has the burden of proof to show to the satisfaction of the Director that an establishment is not operating, or will not be operating, as a casino. The Director’s determination is final. (4) Conclusive Evidence that an Establishment Is Not a Casino: The following establishments are not casinos for purposes of this rule: (a) An establishment whose annual non-Lottery sales are at least 50 percent of the establishment’s total income as defined in section (5) of this rule. This subsection does not apply if the Director determines that the establishment is a convenience store or a business not normally associated with the on-premise consumption of food and alcoholic beverages as described in OAR 177-045-0030(2). (b) A private club as described in ORS 471.175 so long as the private club is not engaged exclusively in the business of selling Lottery tickets and shares. (5) Income Analysis: In determining whether an establishment meets the criteria set forth in subsection (4)(a) of this rule, the Director shall conduct an income analysis as set forth below. (a) General: The Director shall conduct a review of the establishment’s total income which, for the purpose of this rule, shall equal the sum of the establishment’s total annual Lottery compensation and the establishment’s annual non-Lottery sales. For a person applying to become a Video Lottery retailer, the Director shall conduct a review of the establishment’s projected total income which, for the purposes of this rule, shall equal the sum of the establishment’s projected total annual Lottery compensation and the establishment’s reasonably projected annual non-Lottery sales. If the review of an establishment’s total income shows that the establishment’s annual non-Lottery sales are less than 50 percent of total income or projected total income, and there is no conclusive evidence that the establishment is not a casino as explained in section (4) above, the Director shall consider other factors as set forth in section (6) below in determining whether the establishment is operating or may operate as a casino. The twelve-month period selected for the review will be chosen by Lottery staff. The ratio of an establishment’s total annual Lottery compensation to its total income shall be determined by dividing the establishment’s total annual Lottery compensation by the sum of: (A) The establishment’s actual, or in the case of an applicant, reasonably projected annual non-Lottery sales; and (B) The establishment’s actual or projected total annual Lottery compensation. (b) CPA Review: The retailer or applicant may request that a Certified Public Accountant (CPA), engaged and paid for by the retailer or the applicant, verify the accuracy of the Lottery’s calculation of the retailer’s annual non-Lottery sales or the applicant’s reasonably projected annual non-Lottery sales. The CPA must use procedures specified by the Lottery and document his or her analysis as required by the Lottery. The Director may consider the CPA’s analysis in making the final determination. (c) Director’s Determination: The final determination of the ratio of an establishment’s actual or projected total annual Lottery compensation to the establishment’s actual or projected total income shall be made by the Director. (d) Business Records: For the purposes of this rule, a Lottery retailer must acquire, compile, retain, and make readily available to the Lottery all business sales and expense records that are pertinent to the calculation and determination of the establishment’s total income for a period of 24 months. Required records of the gross non-Lottery sales must be detailed and correct including, but not limited to, records of the cost, price and amount of goods sold, bank statements, records of daily sales, and other relevant sales records. Lottery staff shall be allowed to perform examinations of these records, and make any copies necessary to complete the review. Records and accounting information must be provided, at the retailer’s expense, in any form or format reasonably requested by Lottery staff. Retailers operating multiple establishments must maintain separate and complete records as specified in this subsection for each establishment they operate. In the absence of adequate records, Lottery staff will make a reasonable estimate of annual non-Lottery sales based on available records and information. In making a reasonable estimate, the Lottery will only rely on records and information that the Director concludes are credible and accurate. (6) Factors to Consider: If the income analysis indicates that the establishment’s annual non-Lottery sales are less than 50 percent of total income or projected total income, and there is no conclusive evidence that the establishment is not a casino as explained in section (4) above, the Director shall consider additional relevant factors such as those described below to make a final determination whether the establishment, taken as a whole, is operating as a casino or may operate as a casino. An establishment who meets at least four of the following factors will be considered to not be operating as a casino: (a) The number of meals on the menu exceeds the minimum number required under OAR 177-040-0050. (b) The establishment has non-Lottery entertainment options such as televisions, jukebox, pool, or darts. (c) The establishment’s assumed business name does not contain words, references, or allusions to gambling or gambling related objects or activities. (d) The establishment has more advertisements for food or other non-Lottery products than it does for Lottery products. These advertisements must be visible from the exterior. (e) For at least five years, the establishment has: had a Video Lottery retailer contract with the Lottery; has operated with the same or similar business model; and has maintained satisfactory compliance with this rule. (f) The establishment’s dining seats as defined in OAR 177-040-0050 contain tableware such as utensils, napkin dispensers, or condiments. (g) More than 50 percent of the establishment’s non-Lottery sales is sales of food, non-alcoholic beverages, and alcoholic beverages. (7) Compliance Plan: (a) General: For purposes of selling Video Lottery tickets and shares, the Lottery Director shall determine whether a Lottery retailer is operating an establishment as a casino, or in the case of an applicant, will be operating as a casino in violation of this rule. When the Director determines that an existing Video Lottery establishment is operating as a casino pursuant to review under section (6) of this rule, the Director shall notify the retailer of the determination in writing, and set forth the reasons for the determination. The Director shall provide the retailer the opportunity to develop and implement a plan to bring the establishment into compliance with this rule within six months from the date of this written notification. The plan must be submitted within 30 days from the date the notification is issued by the Lottery. The plan shall include an analysis of the retailer’s business operation to show that the retailer has made a reasonable determination of what changes need to be made and the steps the retailer intends to take to bring the establishment into compliance. A retailer may not restrict access to any Lottery game to achieve compliance with this rule without prior written approval from the Director. The retailer’s submission of the plan is for the purpose of demonstrating to the Lottery that the retailer seeks to bring the establishment into compliance. The Lottery will review the retailer’s plan and may offer guidance to help the retailer bring the establishment into compliance. The retailer is solely responsible for implementing the plan and for its success or failure during the six month period. (b) Four Month Review: At the end of the first four months of the six-month period, the Lottery will review the retailer’s progress toward compliance, and may provide the retailer with factual information, analysis, or recommendations if it appears to Lottery staff that doing so will assist the retailer in bringing the establishment into compliance. (c) Determination at End of Six-Month Period: At the end of the six-month period, the Director shall determine whether the establishment is in compliance. A retailer shall be deemed to be in compliance if either: (A) The establishment’s total Lottery compensation was not more than 50 percent % of the establishment’s total income, as set forth in section (5) of this rule, over the entire six-month period; or (B) Based upon an analysis of some or all of the factors set forth in section (6) of this rule, or other additional factors, the Director determines that the establishment is not operating as a casino. (d) Sixth Month: If the establishment’s total Lottery compensation was not more than 50 percent of the establishment’s total income, as set forth in section (5) of this rule, for the sixth month of the plan (but not the entire six months), the Director may extend the original six month period of the compliance plan up to three additional months if, in the opinion of the Director, the retailer will become compliant within that time. At the end of the additional time period, the Director shall determine whether the establishment is in compliance based upon subsection (7)(c) of this rule. (e) Termination: If, at the end of the compliance period, the Director determines that the establishment continues to operate as a casino, the retailer’s contract to sell Video Lottery tickets and shares shall be immediately terminated. (f) One Year Review: If, at the end of the compliance period, the Director determines that the establishment is no longer operating as a casino, the Director shall send a notice of compliance to the retailer. At the end of one year commencing on the first day of the month following notification of compliance, the Lottery will conduct another compliance review as set forth in this rule. If the Director determines that the establishment is again operating as a casino, the retailer’s contract to sell Video Lottery tickets and shares shall be immediately terminated. The retailer shall not be given the opportunity to implement a compliance plan as described in subsections (7)(a), (b), (c), and (d) of this rule in these circumstances. Nothing in this subsection prohibits the Director from initiating another review at any time as set forth in section (3) of this rule. (g) Application Denial: If a person applying to become a Video Lottery retailer is projected by the Lottery not to be in compliance with the requirements of this rule, the Director shall deny the application. (8) Re-Application: Re-application after an application denial is covered under OAR 177-040-0010(8). Re-application after a contract termination is covered under OAR 177-040-0120.