The Pennsylvania skill games tax picture right now is simple in outline and messy in the details: there is no dedicated state gaming tax on the roughly 70,000 skill game terminals in bars, clubs, and convenience stores across the commonwealth, so operators pay ordinary business income tax on their profits and players pay tax on their winnings the same way they would for any other gambling income. That may change soon. Governor Shapiro has proposed taxing gross skill game revenue at 52 percent, competing bills would set the rate as low as 16 percent, and the Pennsylvania Supreme Court is weighing whether these machines are legal at all.
What the Tax Rules Look Like Today
Skill game terminals do not fall under the Pennsylvania Gaming Control Board. Casino slot machines do, and casinos pay tax rates that reach roughly 54 percent of gross terminal revenue. Skill game operators pay none of that. No state agency takes a percentage of each dollar wagered, and no central computer tracks play the way it does on casino floors.
That doesn’t make the money tax-free. Revenue an operator or venue owner earns from a machine is ordinary business income. Sole proprietors report it on federal Schedule C. Partnerships and S corporations pass it through to their owners. Pennsylvania taxes that income at the state’s flat personal income tax rate of 3.07 percent, the same rate that applies to any other business profits.1Commonwealth of Pennsylvania. Personal Income Tax The general 6 percent state sales and use tax may also apply to charges for playing, since the tax reaches retail sales of services within the state.2Pennsylvania General Assembly. Pennsylvania Code 72 P.S. Taxation and Fiscal Affairs – Imposition of Tax
The gap between “some regular taxes” and “a dedicated gaming tax” is large. Casinos hand over more than half their slot revenue. Skill game operators hand over what any pizza shop or laundromat would owe on business income. That disparity is what’s driving every proposed bill and every lawsuit on this subject.
Taxes If You Play
Winning money on a skill game is taxable even though the machine itself is unregulated. Pennsylvania treats gambling and lottery winnings as a separate class of taxable income and applies the flat 3.07 percent rate to it.1Commonwealth of Pennsylvania. Personal Income Tax What the machine is called doesn’t matter. Gambling, skill gaming, amusement — the money you walk out with is taxable income.
Subtracting Your Wagers in Pennsylvania
Pennsylvania lets you subtract what you wagered from what you won when you calculate taxable gambling income for state purposes. Put $300 into machines over the year and win $500, and your taxable gambling income is $200. You need records to prove it, and the burden of proof is on you. Travel, meals, parking, and other expenses are not deductible against gambling income under Pennsylvania rules.3Commonwealth of Pennsylvania. Gambling and Lottery Winnings
Federal Reporting and Withholding
All gambling winnings are taxable at the federal level regardless of amount. You report them even if no one hands you a form. When a single payout crosses a threshold, the payer files a Form W-2G with the IRS. For calendar year 2026, the reporting threshold is $2,000 for winnings from slot-machine-type play. If winnings from a single play exceed $5,000 after subtracting the wager, the payer must withhold 24 percent for federal income tax.4Internal Revenue Service. Instructions for Forms W-2G and 5754
Federal law lets you deduct gambling losses, but only up to the amount of your winnings and only if you itemize on Schedule A.5Internal Revenue Service. Miscellaneous Deductions (Publication 529) Keep a session log with dates, locations, amounts wagered, and amounts won or lost. If the IRS gets a W-2G showing a $3,000 win and you don’t report it, expect a notice with interest and penalties. The IRS underpayment interest rate for the first quarter of 2026 is 7 percent, compounded daily.6Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
Taxes If You Own or Distribute Machines
If you own or distribute skill game terminals, your net income is business income subject to both Pennsylvania and federal taxes. Pennsylvania taxes it at the flat 3.07 percent rate.1Commonwealth of Pennsylvania. Personal Income Tax Federal treatment depends on how you’re organized.
Sole proprietors and single-member LLCs owe self-employment tax on net earnings: 12.4 percent for Social Security up to the annual wage base, plus 2.9 percent for Medicare, totaling 15.3 percent. An additional 0.9 percent Medicare surtax applies to net self-employment income above $200,000 for single filers or $250,000 for married couples filing jointly. Regular federal income tax sits on top of all that.
Operators who buy terminals can usually deduct the cost using Section 179 expensing. For 2025, the maximum Section 179 deduction is $2,500,000, and the limit typically adjusts upward for inflation each year.7Internal Revenue Service. Instructions for Form 4562 Most operators can write off the full purchase price in the year the equipment is placed in service rather than depreciating it. The equipment has to be used in the active conduct of a trade or business to qualify.
The Federal Wagering Excise Tax Doesn’t Apply
The federal government imposes an excise tax on certain wagers under 26 U.S.C. § 4401, but coin-operated gaming devices are specifically exempt. Federal regulations exclude slot machines and similar coin-operated devices, whether they take a coin, a token, or nothing at all, from the wagering excise tax.8eCFR. 26 CFR Part 44 – Taxes on Wagering Skill game terminals fit within that exemption. Operators do not file Form 730 (the monthly wagering tax return) or Form 11-C (the annual wagering occupational tax registration) for these machines.
Local Licensing Fees
Even without a state gaming tax, many Pennsylvania municipalities charge annual licensing fees for each skill game terminal on a business’s premises. Scranton, for example, charges $100 per machine.9eCode360. City of Scranton Code – Chapter 172 Gaming Machines Other municipalities charge several hundred dollars per terminal, and some have tried outright bans or set fees high enough to discourage placement.
A licensing fee is not a tax on profits. It’s a flat annual charge for the right to operate the equipment, and it stays the same whether a machine earns $50 a day or $500. Some jurisdictions require a visible decal on each cabinet showing the fee has been paid for the current year. Operating without a valid license can result in equipment seizure by local law enforcement. Deadlines, fee amounts, zoning rules, and registration requirements all vary by municipality, so if you place machines in more than one town you need to check each set of local rules.
Proposed State Tax Legislation
Several competing proposals sit on the table in Harrisburg. None passed during the 2025 budget cycle. The disagreement is not whether to tax skill games but how heavily.
- Governor Shapiro’s 2025-26 budget proposed a 52 percent tax on gross terminal revenue, split 47 percent to the General Fund and 5 percent to the Lottery Fund. The administration estimated roughly $400 million a year in revenue.10Commonwealth of Pennsylvania. Governor Shapiro Unveils 2025-26 Budget Proposal
- Senate Republican leaders backed SB 756, which would tax skill games at 35 percent of gross revenue.11Pennsylvania General Assembly. Senate Bill 756
- Pace-O-Matic, the industry’s largest manufacturer, lobbied for a 16 percent rate.
- A bipartisan pair of state senators proposed a flat $500 monthly fee per terminal instead of a percentage tax, projected to bring in about $300 million a year.12Pennsylvania General Assembly. House Co-Sponsorship Memo – Regulating PA Skill Video Games
Both chambers said they expect to take up the issue again in 2026. If a bill passes, the Pennsylvania Department of Revenue would handle collection.
The Legal Cloud Over the Whole Framework
None of the tax proposals matter if the machines themselves are found illegal. The Pennsylvania Supreme Court heard oral arguments in late November 2025 on whether skill game terminals are illegal slot machines under state gaming law. The attorney general’s office argued that machines that look and play like slot machines should be treated as slot machines. Pace-O-Matic’s attorneys pointed to a Commonwealth Court ruling that held the devices are “not gambling devices per se” and do not constitute illegal slot machines under the state crimes code.13Pennsylvania Courts. In re Three Pennsylvania Skill Amusement Devices As of early 2026, no ruling has been issued. A decision that these machines violate the Gaming Act could functionally ban them statewide and shift the question from taxes to seizures and criminal penalties.
Pennsylvania’s licensed casinos have also sued, arguing that the state’s collection of roughly 54 percent tax on casino slot revenue while collecting nothing on skill game revenue violates constitutional equal-protection guarantees. That case adds another layer of uncertainty for anyone making long-term decisions about buying, hosting, or investing in these machines.