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November 23, 2014

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Dotty vs. Goliath: Can the little slot tavern win a fight with Big Gaming?

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Justin M. Bowen

Cindy Clark plays a slot machine at Dotty’s near Eastern and Serene in Henderson on Thursday, March 24, 2011.

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Campaign contributions from gaming companies to the Clark County Commission

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Number of slots at gaming establishments in Clark County

Dotty's Gaming Commission Hearing

Nevada Gaming Commissioner John Moran Jr. asks attorney Patty Becker and Michael Eide, representing Dotty's Gaming & Spirits, a series of questions regarding the establishment, Thursday, Aug. 25, 2011. The commission heard arguments by Dotty's regarding a change to state gaming regulations. Launch slideshow »

Dotty's

Cindy Clark plays a slot machine at Dotty's near Eastern and Serene in Henderson on Thursday, March 24, 2011. Launch slideshow »

Slots in Las Vegas, by the numbers

658 — Convenience stores

569 — Restaurants and bars

146 — Casinos

108 — Grocery stores

30 — Drug stores

20 — Liquor stores

11 — Laundromats

3 — Car washes

1 — Golf course

Dotty’s is a gambler’s paradise for a certain type of customer. The taverns offer easy parking, cheap cigarettes and few distractions from the main attraction of 15 slot machines.

It’s a pioneering business model that hit it big in the valley. Dotty’s grew from nothing to 69 taverns in Clark County with about 1,300 slot machines in 18 years. In doing so, Dotty’s executives kept a low profile while being accused of skirting gaming rules.

The approach has grown so successful that it’s sparked a fight that pits strip mall taverns versus Strip titans. On Tuesday, Dotty’s will find itself in the cross hairs of Clark County commissioners considering new policies that could upend some of its competitive advantages. This battle matters because locals gamble $2 billion annually, according to UNLV’s Center for Gaming Research.

Mike Eide, Dotty’s chief operating officer, said county leaders misunderstand his company because it “doesn’t look like a typical bar.” He said Dotty’s has spent millions retrofitting its taverns to comply with county rules.

“I think what they’ve put in place, we’ve complied with,” Eide said. “They should tell us what law we’re not following.”

On the other side, Clark County Commission Chairman Steve Sisolak and Las Vegas’ big casinos lead the call for stronger rules.

Nevada Resort Association, the state’s top gaming trade group, and Station Casinos, which dominates the locals casino market, argue that Dotty’s has succeeded by playing outside the rules. Their argument is that as a tavern, Dotty’s gaming revenue is supposed to be “incidental” to the money it makes on food and beverage sales. But since the law doesn’t define “incidental,” Dotty’s has been allowed to make most of its money on slots, without the restrictions and tax burdens faced by conventional casinos.

The commission’s task this week will be to strike the right balance.

“I’m not sure if it’s possible to come up with a solution that doesn’t adversely impact someone,” Commissioner Larry Brown said.

Dotty’s growth spurt

Dotty’s arrived in Nevada with little fanfare in 1996 when it opened six taverns with slot machines.

Founder Craig Estey had launched the company in Oregon five years earlier using a similar model. Although growth in Nevada was slow at first, the company eventually found traction, opening 24 more locations by 2006 and 32 more by 2011. Estey is listed as Dotty’s president on the private company’s Nevada business license.

In Southern Nevada, Dotty’s 69 locations are scattered in strip malls across the valley. Each one looks nearly identical, offering a homey decor and hushed surroundings.

Sisolak and other critics point out that Dotty’s food and drink offerings are often limited to pre-packaged sandwiches, chips and crackers, with some bottles of soda or beer behind the bar.

The company’s success first drew attention in Oregon. Regulators argued that Dotty’s was primarily a gambling business. A 1997 audit by the Oregon lottery staff found that 21 of 22 Dotty’s locations in Oregon, in violation of state law, received more than two-thirds of their revenue from gambling.

Estey sold his Oregon holdings in 2007 after being investigated by the state’s lottery commission for a 2005 domestic violence incident and lying to Nevada gaming regulators. He was fined $200,000 in Nevada for lying to regulators about the domestic violence incident. No criminal charges were filed in the case.

As Dotty’s spread across the Las Vegas Valley, the taverns caught the eye of the powerful Nevada Resort Association and Station Casinos. They complained to the county commission, and regulators started to pay more attention.

Under state and county law, slot machines can only be an amenity at taverns — like a pool table or dart board — not the main attraction. One county audit in 2010 found several Dotty’s locations brought in 90 percent of their revenue through slot machines.

“You don’t go into Dotty’s unless you’re going there to gamble,” Sisolak said. “Nobody goes to Dotty’s for a beer.”

After the audit, the county commission passed regulations in 2011 that forced Dotty’s to start acting more like bars. The new rules required at least 2,500 square feet of public space, seating for 25, a kitchen that’s open at least 12 hours a day and a bar with at least eight embedded slot machines.

In response, Eide, the Dotty’s executive, said the chain expanded its menu to include two dozen items, including oatmeal, mozzarella sticks and chicken tenders.

Tavern owners had two years to make renovations with county inspections planned for 2013. That’s when the first signs of trouble emerged.

Citations, then problems

Inspectors started making visits in April 2013 and found 17 taverns that failed to meet the code — 15 of them Dotty’s. The issue highlighted in the citations: Dotty’s custom slot machines didn’t meet the county’s code.

But the citations had problems.

County Manager Don Burnette said the rules were vague and hard to enforce. As a result, the county dropped the cases.

Burnette asked commissioners for more specific language. In response, county commissioners approved a 90-day freeze on tavern gaming applications in March until they could consider new, more clear rules.

The commission is searching for a way to regulate very different approaches to gaming.

Before they can offer slot machines and table games, big casinos are required by law to spend hundreds of millions of dollars building hotel rooms, restaurants, shopping malls and showrooms. They also pay a tax on gross gaming revenues of up to 6.75 percent.

But taverns like Dotty’s don’t have that overhead and have a more friendly tax structure.

They rent a relatively low-cost storefront and require just a few employees. Dotty’s, like PT’s Pub, falls under a “restricted license” with a per-machine fee of $574 per year.

Eide said he doesn’t think any new regulations passed by the county will slow Dotty’s growth.

“The only thing is I hope is that they don’t hurt the small (bars),” he said. “I’m afraid to get us, they’re going to hurt that person. I don’t think that’s right.”

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