Tax Reporting for Raffles

This post is courtesy of Ellis Carter, blogger at Charity Lawyer Blog.

As the recession deepens, we get more and more creative ideas from people wanting to conduct complex raffles. In Arizona, the most popular questions this year involve raffles of real estate. While raffles can be great revenue generators for charitable organizations, many charities do not realize that in most states, including Arizona, raffles are illegal gambling. Cautionary tales abound. Most states have specific exceptions for charitable raffles but require the charity and the raffle to meet specific criteria to qualify. For example, a raffle is not gambling in Arizona if:

  • it is sponsored by a nonprofit that has been in existence for 5 years;
  • no insider receives a direct or indirect pecuniary benefit other than participation on an equal basis with all other participants; and
  • no person participates directly or indirectly in the management, sales or operation of the raffle other than the non-profit’s employees and agents.

Many jurisdictions require non-profits to obtain a permit to conduct a raffle. Permits can take weeks or even months to process. In addition, there are number of tax issues that must be considered when planning a raffle. Tax issues include the following:

Deductibility of Ticket Price. A ticket purchaser has not made a deductible gift. The consideration pid is considered equal to the “chance” to win a prize therefore there is no disinterested gift and therefore no contribution deduction.

Deductibility of Prizes Contributed. Those contributing prizes to the raffle may be entitled to a deduction depending upon whether the contribution is an interest in property (as opposed to a non-deductible service or right to use property). The charitable deduction for in-kind contributions that are raffled off in support of a charity are generally going to be limited to the taxpayer’s basis in the property (rather than fair market value).

Non-profit’s Obligation to Report Prize Income. The prizes are taxable income to the winners so the non-profit must ensure it properly reports the raffle prizes to the I.R.S. Generally, raffle prizes must be reported on Form W-2G with a copy to the winner if a) the amount paid, reduced by the amount the person paid for the chance to win a prize, is $600 or more; and b) the payout is at least 300 times the amount of the wager.

Non-profit’s Obligation to Withhold from Prize Income. If the fair market value of winnings amount to more than $5,000, the non-profit must withhold taxes from the winnings and report this amount to the I.R.S. on Form W-2G. The non-profit is liable for any tax it fails to correctly withhold.

Back-up Witholding. If the prize is reportable (the amount paid, reduced by the amount the person paid for the chance to win a prize, is $600 or more; and b) the payout is at least 300 times the amount of the wager) and the winner fails to supply a taxpayer identification number, then the Foundation must withhold 31% of the total proceeds.

Federal Laws. Federal law strictly limits non-profits from conducting multi-state raffles. If the non-profit plans to use the U.S. mails for any part of the raffle – e.g. for mailing entry cards or raffle tickets – there are federal laws and regulations that bear consideration. Also, the FTC is empowered to regulated certain types of sweepstakes and contests.

Non-profits sponsoring raffles should consider creating raffle rules and treating them as contracts. Drafting detailed rules permits the non-profit to set defined limits on the giveaway – who may participate, what laws apply, warranty and liability disclaimers, etc. Raffle rules also provide a way for non-profits to cancel or modify their obligations in the event that too few tickets are purchased or there are other technical problems. We have also advised non-profits running raffles to have the raffle winner (or winners) sign an affidavit of eligibility and a release of liability. This is a good place to ensure the winner understands his or her tax reporting obligations and is eligible to accept the prize.

Constructing a legal and compliant raffle takes time and may require the advice of a professional. Non-profits that take care to do it right will avoid embarrassing and costly legal mistakes and have a model that they can use to raise funds again and again.

Does your raffle require a raffle license?

Before a raffle is held, most states require organizations to obtain a charitable gaming license or permit. As with gambling laws, gambling permit and licensing requirements differ from state to state.

Here are a couple of states that require a raffle license:

Connecticut has six classifications of raffle permits based on factors such as the duration of the raffle and the total value of the prizes.

It is compulsory by law that, in Michigan, any printed material about the raffle MUST have the license number printed clearly on it. There are also other requirements that the time, date, and location, as well as the prize(s) must be printed on the tickets themselves.

Since every state is different it is important to check with your state’s raffle laws. Most states have information online but if not you can always contact the state’s attorney general’s office as a first step. In Raffle Secrets we include 11 sample questions to ask when contacting the state attorney general’s office.

Your city or county may also require a raffle license or raffle permit. So be sure to check locally before going forward with your planning.

Are raffles gambling?

Oh, it’s just a little raffle. Right? This can’t be gambling.

Well guess what it is!

When we hear the word gambling what comes to mind are games like poker or slots at casinos. Spend big and win big!But even spending a few dollars (or just 50 cents!) on a raffle ticket is gambling. Anything that is a game of chance that requires money to play is in effect gambling. So games such as bingo and raffles are also forms of gambling and fall under the laws too.

In the US the state governments control gambling laws including raffles. So if you live here in the US the first thing to do is to look up the state raffle laws.

Sometimes people forget to contact their local authorities too. A city or county can also place additional restrictions on charity raffles.

Plus since raffles are gambling they are usually reserved for the state to run or for charities. A business or individual can’t run a raffle for personal gain.

Since navigating the waters of the legal system regarding raffles can be a challenge, Raffle Secrets includes an entire chapter on legal issues.

Yes, raffles are gambling. But when done right they can be a lot of fun – both for the ticket buyers and the charities that run the raffles.

Have a legal question about raffles?

The laws governing raffles can be complex. The laws can be quite strict, and they vary significantly from state to state. If you’re ambitious, you could certainly do your own research. In fact, much of this research has been done for you in the ebook Raffle Secrets, which includes a chapter on legal issues, among other things. You can also find general information on this site to get you going.

If you have a specific legal question, though, you should consider obtaining the assistance of a lawyer. Normally, finding and engaging the right lawyer would require a great deal of time and expense. It might not be worth it if you just need a single question answered. If you have specific questions, try JustAnswer, a service that can connect you with a lawyer who will answer individual questions, one at a time.

Here’s how it works. Enter your question in the JustAnswer box to the left. You get to name your price for the answer. A lawyer will answer, often within minutes, usually within a few hours. The lawyer will send an e-mail notifying you of any answer or may request more information. If you accept the answer, you get to decide how much the answer is worth. I’ve used the service myself, particularly to get answers to thorny tax issues.

What are the raffle laws of each state?

Raffle License or Application

The application for the raffle license may be required by the state, county or city government. Sometimes organizations must file with the state and local government so it is always wise to contact all government agencies. Most applications require a fee.

Raffle Requirements

Each state also has different requirements about the organizations that are allowed to hold a raffle and the manner in which it is conducted.

For example according to the laws of Colorado, the organization must have been in existence for five years before an application for a bingo/raffle license can be made. Some state raffle laws limit the number of raffles that a tax-exempt organization can hold. Other states have other very specific laws about the value of prizes given away, the format of tickets and other aspects of the raffle.

Advance Planning for Raffles

Not-for-profit organizations should also keep in mind that some registering agencies require that permits be applied for in advance. For example in Iowa the department requests that applicants allow up to 30 days for processing the application.

The following is a list of raffle laws by state (where available).

Location Legal? State Law
Alabama No Ala. Code § 13A-12-20
Alaska Yes Alaska Stat. 05.15.010
Arizona Yes Ariz. Rev. Stat § 13-331
Arkansas Yes Arkansas Code,§ 23-114-101, et seq.
California Yes Cal. Penal Code § 320.5; Cal. Code Regs. tit 11, §§ 410-426
Colorado Yes Colo. Rev. Stat. § 12-9-101, et seq.
Connecticut Yes Conn. Gen. Stat. §§ 7-170 to 7-186
Delaware Yes 10-100-102 Del. Code Regs.
Florida Yes Fla. Stat. § 849.0935
Georgia Yes Ga. Code Ann. § 16-12-22
Hawaii No Haw. Rev. Stat. § 712-1220
Idaho Yes Idaho Code Ann. § 67-77
Illinois Yes 230 Ill. Comp. Stat. 15/8.1
Indiana Yes 68 Ind. Admin. Code 21-1-01 through 21-7-14
Iowa Yes Iowa Code § 99B.6
Kansas No Kan. Stat. Ann. § 21-4302
Kentucky Yes Ky. Rev. Stat. Ann. § 239.500-570,995
Louisiana Yes La. Rev. Stat. Ann. §§ 4:701-740; § 27-402
Maine Yes Me. Rev. Stat. Ann. tit. 17 § 331
Maryland Yes Md. Code Title 13 Gaming
Massachusetts Yes Mass. Gen. Laws ch. 271 § 7A
Michigan Yes Mich. Comp. Laws § 432.101 et seq.
Minnesota Yes Minn. Stat. §§ 349.11 to 349.23
Mississippi Yes Miss. Code Ann. § 97-33-50 et seq.
Missouri Yes Mo. Rev. Stat. §§ 313.005 to 313.080
Montana Yes Mont. Code Ann. § 23-5-413; Mont. Admin. R. § 23-16-2602
Nebraska Yes Neb. Rev. Stat.§ 9-1,101 et seq.
Nevada Yes Nev. Rev. Stat. §§ 462-064; 462-130 to 462-200
New Hampshire Yes N.H. Rev. Stat. Ann. §§ 287-A:1 to 287-A:11
New Jersey Yes N.J. Rev. Stat. Ann. §§ 5:8-50 to 5:8-
New Mexico Yes N.M. Stat. Ann.§§ 60-2F-1 to 60-2F-26
New York Yes N.Y. Rac. Wag. Law §§ 185 to 195r
North Carolina Yes N.C. Gen. Stat.§ 14-309.15; § 105‑130.11 et seq.
North Dakota Yes N. D. Cent. Code§ 53-06.1
Ohio Yes Oh. Rev. Code. Ann. § 2915.092
Oklahoma Yes Okla. Stat. tit. 3A, §§ 401 to 427
Oregon Yes Or. Rev. Stat. §§ 464-250 to -995 and Or. Admin. R. 137-025-0020 to -0310
Pennsylvania Yes 10 Pa. Code §§ 311 to 327
Rhode Island Yes R.I. Gen. Laws §§ 11-19-1 et seq.; 41-3-1 et seq.
South Carolina No S.C. Code Ann. §16-19-10 et seq.
South Dakota Yes S.D. Const. § 25;S.D. Codified Laws § 22-25-23 et seq.
Tennessee Yes Tenn. Code Ann.§ 3-17-101 et seq.
Texas Yes Tex. Occ. Code Ann. § 2002
Utah No Utah Const. Art. 4, Sec. 27
Vermont Yes Vt. Stat. Ann. tit. 13 § 2143
Virginia Yes Va. Code Ann. §§ 15.2-912.2; 18.2-334.2; 18.2-340-16 et seq.
Washington Yes Wash. Rev. Code. Ann. § 9.46.0311
Washington, D.C. Yes D.C. Mun. Regs. tit. 30, § 1500 et seq.
West Virginia Yes W. Va. Code R. § 47-21-1 et seq.
Wisconsin Yes Wis. Stat. Ann. § 563-90 et seq.
Wyoming Yes Wyo. Code R. § 6-7-101

 

The information and links provided on this site are intended as an informational resource. RaffleFAQ.com is not responsible for content provided on websites which are linked to from this site. No warranties or guarantees are implied or expressed. Information on this site is not meant as a substitute for advice given from a licensed attorney. Consult with an attorney to ensure compliance with state and local regulations, or risk investigation and/or penalties if a complaint is filed or law enforcement agencies become aware of non compliant activities.

Are raffles legal in the United States?

Some states allow raffles while others do not.

Some states require that you submit a registration form in advance. Other states require a filing fee. It is important to research the laws that apply to the state where the raffle will be taking place.

Some cities, counties/parishes also have additional laws on the books that govern raffles. You should contact local government offices to inquire about the regulations in your local area.

In the states where raffles are legal, the proceeds must benefit a registered charitable organization or school. The raffle cannot be a for-profit money making venture for a business or individual.

Click here for a list of laws by state

Disclaimer: The information and links provided on this site are intended as an informational resource. RaffleFAQ.com is not responsible for content provided on websites which are linked to from this site. No warranties or guarantees are implied or expressed. Information on this site is not meant as a substitute for advice given from a licensed attorney. Consult with an attorney to ensure compliance with state and local regulations, or risk investigation and/or penalties if a complaint is filed or law enforcement agencies become aware of non compliant activities.

Can a for-profit business or individual run a raffle?

No. In the vast majority of cases, raffles must benefit a legally registered non-profit, charitable agency. Contests sponsored by a for-profit businesses, individual or government would either be defined as a lottery (if a ticket purchase is required) or a sweepstakes (if no purchase is necessary). There are other laws that govern these two activities.

It is important to check all laws for your area, where your organization operates and where tickets will be sold. Laws vary by country, state/province, county/district/parish and by city.

Are raffles legal in Canada?

Those who wish to hold a raffle in Canada are likely to ask, “Are raffles legal in Canada?” To find the answer contact the gaming commission of the province where the raffle will take place. This is the government entity that has legal authority over raffles conducted in that particular province.

More information about gaming in Canada.