In my state, they are illegal regardless of how you pay out.
The excise police will come by every once in a while trying to bust these. If one bar gets a visit from the excise, they start calling around all letting others know so its hard for these bars to actually get busted.
I have heard of the first bar getting caught though having their machines confiscated, but these machines all say entertainment only on them. I think the excise police have to actually see someone being paid out before they can actually do anything.
The punishment to bar owner is at first confiscation of the machines and a fine.
I still remember the day I put in $20 and on my first spin I bet 64 credits and hit all watermelons.