• Thomas James

The beer taps were flowing on a recent Thursday night at the Spanked Puppy in Colchester. Although the sports-bar crowd didn't seem interested in the Red Sox game on TV, the room came alive when the jukebox played a '70s hit about unrequited love, "Living Next Door to Alice."

"Alice!" people called out in unison. "Who the fuck is Alice?"

The bartenders were serving up more than suds. Several customers bought stacks of "break-open" tickets, an instant-lottery-style game that is wildly popular at many Vermont watering holes. Players peel back tabs on the front of the business-card-size tickets to see if any of them match the winning patterns on the back. At the Spanked Puppy, patrons up and down the bar plunked down twenties to buy dozens of the $1 tickets in hopes of winning $100 or more.

"Skunked," said one young man, as he tossed the last of his losing tickets onto a small heap on the bar.

Aside from the state lottery, most gambling is illegal in Vermont — but there's an exception: Nonprofit organizations are permitted to use games of chance such as bingo, raffles and break-open tickets to raise money. The last of those methods is by far the most common form of charity gambling. Many bars sell the lottery-style tickets on behalf of charities and are supposed to turn over the proceeds, minus payouts, to their beneficiaries. The Spanked Puppy's recipient is the Colchester Hockey Boosters Association, which funds the town's high school program.

Nonprofit gaming is a surprisingly large and widespread industry in Vermont — one that hauls in millions of dollars with little regulation or oversight.

In the year ending May 2, 216 charitable organizations purchased 39.3 million tickets from wholesale distributors, according to records from the Vermont Department of Liquor Control, which maintains the data. Most of the break-opens, also called pull-tab tickets, retail for $1 or $2.

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When run properly, the system works like this: A nonprofit buys the tickets from a wholesaler such as Best Bingo Supplies in Colchester, which offers boxes at various prices depending on customers' needs. For example, charities can purchase a box of 3,159 tickets for $62, co-owner Jeff Temer said. Gamblers pay $1 for a ticket and peel back the tab. A few hundred of the tickets provide a $1 prize; a handful delivers $5 to $50; and 16 tickets award the biggest prize, $100. If all the tickets in the box are sold, the charity nets $921, Temer said.

Trouble is, nobody in state government checks whether the gaming profits actually reach the charities. In one recent case, a South Burlington bar owner was charged with embezzlement. A bar owner in West Rutland was ordered to pay restitution a few years ago for taking $7,000 meant for an athletic program.

The head of the liquor control department's enforcement division, Skyler Genest, said the office investigates a handful of cases each year. "It's a cash game," he said. "There's a lot of room for diversion of funds."

Further complicating matters: Some bars stop selling tickets from a box after the big prizes have been paid out, creating so-called "dead-soldier" tickets. That makes it more difficult to audit the system or calculate how much the benefiting charity should have been paid.

Groups from every corner of Vermont raised money with break-open tickets last year. They are a favorite fundraising tool of fraternal organizations including the American Legion, the Benevolent and Protective Order of Elks, the Loyal Order of Moose, and the Fraternal Order of Eagles, which typically sell them at their in-house establishments. The Elks in St. Johnsbury bought more than 1.2 million tickets in the past year, more than any other organization.

Why are the tickets so popular with gamblers? In part, Temer said, it's because on average more than 80 percent of the cash that players collectively plunk down is returned to them as prizes. That's more than the roughly 65 percent that state lottery players win back, Temer said.

How does it play out for charities? Seven Days examined federal tax returns for Vermont's larger nonprofit organizations, and these data show that nonprofits typically get only a fraction of the proceeds from games of chance. In their most recent IRS filings, mostly from 2015 and 2016, nonprofits reported $24 million in gambling revenues, but after expenses — mostly payouts to winners — they netted just $3.9 million, or 16 percent.

The return was even lower for Winooski's nonprofit Chittenden Housing Corporation. The affordable housing group's 2015 tax filing showed its gaming revenue topped $808,779, but after expenses — including cash prizes and rent for a bingo hall — it netted $35,139, or 4.3 percent.

Montpelier has certainly noticed this unregulated industry. In his 2013 budget address, then-governor Peter Shumlin floated the notion of taxing break-open ticket sales, estimating it would generate $17 million in new revenue for the state. Nonprofit organizations howled in protest, some of the governor's projected figures turned out to be inflated, and the idea quickly fizzled.

To better spot problems, the Department of Liquor Control persuaded the legislature last year to require nonprofits to report their gaming revenues to the state, deputy commissioner Gary Kessler said. "There's certainly the potential, and people have taken advantage of the potential and have been stealing from charities," he said. An online reporting system is still being developed to carry out the law.

For now, enforcement is sporadic. Bars must inform the liquor department when they plan to sell break-open tickets, and staffers vet the charities that are supposed to benefit.

The department also checks out complaints. Other than that, Genest said, his 11 investigators, who are primarily concerned with liquor laws, can do little to ensure that charities are receiving what they should.

"I don't have any resources to dedicate to any sort of routine compliance or routine audit of the system," Genest said. "Typically, when we get involved with these cases, it's on some sort of complaint or internal intelligence that we've developed."

"We don't want to be the gambling police," he said, "but when it involves one of our licensees, we make an effort to investigate."

An anonymous tipster led the department last year to examine ticket sales at the Sugar House Bar & Grill in South Burlington, formerly Franny O's, which was owned by Nicholas R. Bermudez of Milton.

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Investigator Matthew J. Gonyo quizzed Bermudez, 32, about his sales for two groups: Jones Music Media, which hadn't existed for a year and therefore couldn't benefit from the gaming proceeds, and the Burlington Amateur Hockey Association. According to an affidavit, Bermudez told Gonyo that he had few records from months of ticket sales, and he could not detail where the profits went. He contended that he paid the charities, usually in cash. He told the investigator he suspected his employees had been stealing some of the proceeds.

"I know how this looks, like I'm an asshole stealing from a charity," Bermudez said.

Bermudez was charged with embezzling. The department first said he'd misappropriated $168,181. Gonyo later acknowledged errors in his audit and said the missing amount was much less — $38,808.

The amounts the two charities got from the gaming? Jones Music took in $712, and Burlington hockey association netted $5,789, according to Gonyo's affidavit.

Bermudez's case is pending. He did not respond to a request for comment.

Despite the risk, hundreds of nonprofits rely on income from break-open tickets to survive.

The gaming pays for expensive ice time and hockey equipment, for example, said Chris Rosato, a hockey parent who is president of the Colchester Hockey Boosters Association. "It's vital to us," he said. "If that goes away, then we lose a team sport, basically. It's the only thing that keeps us on the ice, really."

A second Colchester pub, the Clover House, also sells tickets for the hockey nonprofit, which hosts games at Broadacres Bingo Hall on a hill behind Dick Mazza's General Store in Malletts Bay. When they host a bingo night there, hundreds of gamblers can buy their pull tabs.

How many? Last year, the hockey nonprofit purchased more than 1 million break-open tickets to sell at the three Colchester establishments. The group reported $44,245 in gaming profits after expenses on its fiscal year 2016 tax return, the most recent available. Rosato said he's confident that the charity is not being shortchanged.

Still, he acknowledged that there's little accountability from bars, since some discard unsold tickets.

"Even if I went to the Spanked Puppy and said, 'Can you show me your numbers?' I'm sure they're not tracking it," Rosato said. "There's no way to really account for the difference if they're throwing away large numbers of tickets, which I suspect they do."

Seven Days left messages for the Spanked Puppy's owner in person and by phone but did not get a response.

Bars are supposed to keep the unsold tickets, and many comply, according to Kessler. Investigators have found them stuffed into garbage bags, though, making audits difficult.

Rosato insisted the hockey nonprofit is getting paid what it should, citing long-term relationships with the sellers. Many of its members patronize the Spanked Puppy, and the group holds its meetings there. Further, he said, the owner of the Clover House was once a hockey player and coach.

Rosato also has faith in Temer's wholesale company. A year or so ago, Rosato said, Temer called to let him know that a bar was trying to obtain tickets in his organization's name. That was news to the nonprofit, which put the kibosh on it.

The system works, Rosato said, and helps make ice hockey accessible to more kids.

Leaders of other charities expressed similar sentiments.

The Vermont Association for the Blind and Visually Impaired, based in South Burlington, hosts bingo games twice a week at Broadacres. The bingo loses money, but the break-open tickets keep the group in the black.

"The gravy is from the pull tabs," said Steven Pouliot, the executive director. "If we didn't have pull tabs, we probably wouldn't be doing a bingo."

After expenses — including rent for the facility and cash prizes — the association netted $84,191 from gaming, according to its 2016 tax filing. The money pays for trainers to help visually impaired people navigate their homes and neighborhoods, and for costly devices to enhance poor vision, Pouliot said.

"It'd make a huge difference to us if we didn't have that funding," he said.

The Fraternal Order of Eagles No. 793 on Shelburne Road in South Burlington bought nearly 900,000 wholesale tickets last year. The Eagles adhere to strict accounting methods mandated by their national organization, said Karl Hubbard, a past president. Revenues from sales go into a charity fund that in turn benefits groups such as the Epilepsy Foundation of Vermont, he said.

According to Genest, fraternal organizations that sell tickets in-house have fewer problems. Those organizations will not be subject to the liquor department's new online reporting system.

Once it's in place, Kessler expects to get quarterly revenue reports from charities — data that could reveal "gross irregularities," he said.

He hopes that when word spreads that the system exists, and that regulators in Montpelier can easily do the math on break-open tickets, fewer people will take a chance on cheating.