What You Need to Know About Operating Raffles and Online Raffle Ticket Sales
In addition to possessing the required licensing for solicitation where required, charitable and non-profit organizations must also possess the required licensing and permits to operate raffles from their governing jurisdictions. Raffles fall under the category of "Charitable Gaming" and are governed by applicable Federal, State, County, and Municipal Charitable Gaming and gambling Laws. Governance follows the standard hierarchy of jurisdictions as the laws are applied to the activity. The U.S. Federal Government has not made any legal activity permitted by lower jurisdictions illegal, only those activities not permitted by lower jurisdictions, and has established rules in its legislation that define State borders granting governance of gaming activities to State Governments. These Federal laws primarily address Interstate Activities and establish guidelines that must be followed to ensure compliance with State laws. States may then dictate their own regulations or pass the responsibility down to lower levels of government. Only charitable and non-profit organizations may operate raffles in the United States, and registering to solicit in a jurisdiction does not enable an organization to solicit online raffle ticket sales in a jurisdiction where raffles are prohibited or that does not allow online raffle ticket sales.
Navigating the Laws, Rules, and Regulations
Navigating through all the laws, rules, and regulations for charitable activities can seem a bit overwhelming, but in reality it is quite manageable once you understand what needs to be done.
The first step is for charitable and non-profit organizations to register for solicitation of funds for the markets they wish to engage where required. This must be done before an organization can accept any funds from any activity, online or offline. This applies to all activities including but not limited to donations, sale of goods, auctions, fundraising events, ticket sales, etc.
Next, charitable and non-profit organizations must address the laws, rules, and regulations that govern specific activities above and beyond general solicitation. Raffles are considered "Games of Chance" and are under the regulation of Charitable Gaming and Gambling Laws, Rules, and Regulations. Under most circumstances, an organization will need to apply for and receive a license or permit to operate a raffle in their jurisdiction, or the jurisdiction where the raffle drawing will be held if the location of the actual drawing will be different. The jurisdiction that matters the most is the jurisdiction in which the raffle drawing is held. This jurisdiction will govern the laws, rules, and regulations you must follow and be bound by for your raffle. Raffle tickets and the act of selling raffle tickets are a separate component from the raffle drawing since raffle tickets are “items of commerce” and are neither the actual act of a raffle drawing nor the act of selecting a winner. It is the act of selling raffle tickets, and to whom those tickets are sold that place online raffle ticket sales in the realm of regulatory scrutiny. Technically, there is no such thing as an “online raffle” since the drawing is conducted offline. The issue is online raffle ticket sales or raffle entry over the Internet.
Commerce Clause
The “Dormant” Commerce Clause doctrine stands for the proposition that, since regulation of interstate commerce is a power affirmatively granted to the Federal government, the states have no right to regulate it in any way that unduly burdens interstate commerce. The “Dormant” Commerce Clause requires the invalidation of much of the state Internet regulations and acts as a roadblock to state regulation by restricting states and localities from impeding the free flow of goods and services across state lines.
Any state law which affects interstate commerce must be:
(1) rationally related to a legitimate state concern and
(2) the burden on interstate commerce must be outweighed by the benefit to the state’s interests.
In determining whether the burden is outweighed by the benefits, a court must examine whether the state objective could be achieved by a means less restrictive on interstate commerce. Furthermore, it is important to note that promoting the economic interest of its own citizens at the expense of out-of-state citizens is not a legitimate state objective.
Since raffle tickets are “items of commerce,” under the “Dormant” Commerce Clause states cannot impede the sale of raffle tickets online by out-of-state charities and non-profits since states would not have legitimate concerns or interests that would qualify the placing of such burdens on interstate commerce over charitable fundraising. At least this was true until the UIGEA was passed by Congress, and this is where compliance technologies become relevant in modern day online fundraising.
Interstate Wire Act of 1961
The Interstate Wire Act of 1961, often called the Federal Wire Act, is a United States federal law prohibiting the operation of certain types of betting businesses in the United States. Non-profits and charities are not betting businesses, but rather utilize licensed Charitable Gaming activities for the purpose of Charitable Fundraising. Although this legislation may be referenced from time-to-time, the U.S. Department of Justice has determined it does not apply to Charitable Gaming activities. The opinion of the U.S. Department of Justice is that the Interstate Wire Act of 1961 only applies to “Sporting events and contests.”
The United States Court of Appeals for the Fifth Circuit
ruled in November 2002 that the Federal Wire Act prohibits electronic
transmission of information for sports betting across telecommunications lines,
but affirmed a lower court ruling that the Wire Act "'in plain language'
does not prohibit Internet gambling on a game of chance." While some
states have specific laws prohibiting online gambling and the sale of raffle
tickets on or through the Internet, many do not. Although, there may be
additional localized domicile restrictions that would prohibit the sale of
raffle tickets on the Internet that only apply to drawings in a specific
jurisdiction.
Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA)
The Unlawful Internet Gambling Enforcement Act of 2006 (or UIGEA) is United States legislation regulating online gambling. The UIGEA prohibits non-profits operating games of chance from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet and that is unlawful under any federal or state law. It was added as Title VIII to the SAFE Port Act (found at 31 U.S.C. §§ 5361–5367) which otherwise regulated port security. This law does not prohibit legal activities that are licensed or permitted by states, and establishes baseline standards that systems and software platforms must conform to in order to be used to operate games of chance. Since a raffle by definition is a game of chance, the operation of raffles must meet these requirements.
"The law requires systems to establish policies and procedures that are reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions."
Contrary to what you may have been told there is no federal ban or Act that makes interstate or online raffle ticket sales illegal. There is only this stipulation above that requires the “reasonable” ability to prevent the sale of raffle tickets to those who are from states that “explicitly” prohibit raffles or “explicitly” prohibit the sale of raffle tickets online. This would constitute a prohibited transaction.
It is always best practice to review the laws of each state prior to engagement. In some instances a state may have laws that prohibit online raffle ticket sales for its domicile organizations due to other requirements, but do not prohibit the sale of raffle tickets on the Internet which will not apply to non-domicile organizations of that state, while others may only enforce their laws domestically in their own state. Keeping your raffle ticket sales within your state is always the easiest and least burdensome, not to mention carries the least amount of risk and liability.
Having a chapter in a raffle friendly state is always advantageous if your current state is not raffle friendly.
United States Postal Service (USPS)
Domestic Mail Manual (DMM) PS-307 (601.13.3) prohibits the mailing of raffle tickets and using the USPS to sell raffle tickets. The USPS does however allow the advertising of raffles.
The Department of Justice notified Congress that it will no longer enforce the criminal lottery statute (18 U.S.C. Section 1302) against gambling advertisement mailers, so long as the activity advertised is legal and the mailing does not provide any entry materials. On December 5, 2000, the DMM was amended to revise the standards governing lotteries to incorporate this change.
While the DMM change revised the standards governing "advertising" for legal lotteries, it did not alter the standards that "unlawful matter includes any letter, newspaper, periodical, parcel, stamped card or postcard, circular, or other matter permitting or facilitating participation in a lottery; any lottery ticket or part thereof or substitute; and any form of payment for a lottery ticket or share (" Referred to in 18 U.S.C. Section 1302 as "entry materials").
Raffles that incorporate "prize," "chance," and "consideration" are considered lotteries under the statute and postal standards. "Tickets" for such raffles are considered unlawful mail matter and remain nonmailable.
The above federal statute is fairly self explanatory; don’t use the mail for selling your raffle entries or accepting payment for raffle entries. The
only exception to this rule is any No Purchase Necessary entry materials which
can be mailed as they do not comprise any consideration since a monetary
exchange is excluded.
Maintaining Regulatory Compliance
Laws, rules, and regulations specific to raffles are currently governed by States, Counties, and Municipalities. Typically charitable gaming is governed by state regulations, but in some cases states place the responsibility of regulation on counties, and some on municipalities. In addition to multiple jurisdictional governance and regulation, the rules and regulations can be complex and restrictive. For example, a state may only allow raffle tickets sales in certain areas within the state while municipalities within those areas may prohibit raffle ticket sales. Additional laws may also exist which prohibit or limit the promotion, advertising, etc., of such activities. Non-profits must make sure their raffles are in compliance with their governing jurisdiction's raffle laws, rules, and regulations. Raffle laws, rules, and regulations vary from state-to-state. Typically, a non-profit's raffle is legal only in the state in which the non-profit is licensed to operate the activity, unless the non-profit is registered to solicit with another state, and that state allows charities to conduct raffles. Some states explicitly prohibit the sale of raffle tickets online. Organizations operating raffles must comply with these rules and regulations. This alone can make the maintenance of compliance difficult in the real world, and was considered impossible on the Internet prior to the invention of Virtual Checkpoint™.
Currently Alabama, California, Hawaii, Indiana, Montana, South Dakota, Utah, and Washington either prohibit raffles or explicitly prohibit the sale of raffle tickets on the Internet by law. Other prohibitive restrictions may apply in other states where a drawing is to be held, but if the state where the raffle drawing is being held does not restrict the sale of raffle tickets on the Internet, the organizations must still restrict ticket sales in these prohibited jurisdictions. This list may change from time-to-time depending on new developments and legislation.
Virtual Checkpoint™ enables organizations to establish policies and procedures that are reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions for their raffles enabling their online raffle ticket sales to meet compliance requirements. After you have gone through this process, you will be able to take advantage of the latest technologies to tap the best fundraising activities for your organization for many years to come.
Virtual Checkpoint™ enables organizations to establish policies and procedures that are reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions for their raffles enabling their online raffle ticket sales to meet compliance requirements. After you have gone through this process, you will be able to take advantage of the latest technologies to tap the best fundraising activities for your organization for many years to come.
Do not rely on the actions of other non-profit entities to make legal decisions. Do your own due diligence by reviewing the laws of each state in which you intend to solicit raffle ticket sales to determine if a state “explicitly” prohibits raffles or online raffle ticket sales, and consult with an attorney. You should always perform follow-up reviews from time-to-time to keep up with changes to laws, rules, and regulations concerning raffles, as well as all of your organization's fundraising activities. It is always the responsibility of the non-profit organization to take ownership of its fundraising activities and understand the business it is in, especially as a regulated non-profit business or charity. The Raffle America™ fundraising software platform provides all of the tools you will need, but ultimately it is the non-profit's responsibility to configure and maintain their account properly to ensure the regulatory compliance of their activities.
Do not be fooled by platform providers that do not possess regulatory compliance capabilities or who pedal false loopholes. If your organization’s name is on your raffle license or permit, it is your liability. Perform your due diligence, learn the rules, seek professional legal advice, plan, and prosper.
Reporting Raffle Prizes and Taxes
(IRS Summary)
Raffle ticket sales are not donations and are not tax deductible. Any misrepresentation that attempts to disguise the sale of a raffle ticket as a donation is fraudulent. In addition, raffle participants that claim their raffle ticket purchases as donations or as a charitable deduction may unknowingly be committing tax fraud. Also, when an organization accepts payment for any type of game of chance entry it is a raffle and not a sweepstakes, even if a no purchase necessary element exists. Once a game of chance entry is offered in exchange for any direct monetary consideration, it becomes a raffle. Calling it a donation for a sweepstakes does not alter this relationship. Word play will not change this. If your fundraiser comprises a Prize, Chance, and Consideration then it is a raffle.
Non-profit organizations are required to report raffle prizes if the prize is at least 300 times the amount of the ticket price and the amount of the prize, minus the ticket price, is over $600. If this is the case, the organization must file Form W-2G with the IRS, and give a copy to the person who wins the prize. Further, the winner must report their prize income on Form 5754.
For winnings over $5,000, the non-profit must withhold 25 percent of the income and report this amount to the IRS on Form W-2G. If the prize is not a cash prize, and the fair market value is over $5,000, the winner must pay 25 percent of the value to the non-profit, minus the cost of the ticket entry. Further, if the winner does not submit his or her Social Security Number or other tax number to the organization, and the raffle prize must be reported, then the non-profit must withhold 28 percent of the prize income. This is known as backup withholding. In addition to Form W-2G, the non-profit must report the withheld income on Form 945, Annual Return of Withheld Federal Income Tax.
With few exceptions, the IRS considers income from raffles to be unrelated business income. For most activities that a non-profit engages in, they are exempt from taxation on their income. However, for activities that are unrelated to the non-profit's exempt purpose, it must pay taxes on that portion of the income. Although a raffle may ultimately go to pay for exempt activities of a non-profit, running a raffle is not substantially related to the non-profit's exempt purpose. This means that non-profit organizations must pay taxes on income from a raffle.
It is illegal for non-profits to regularly engage in charitable gaming, or for charitable gaming wages to provide regular and essential income to an organization. Therefore, your organization should not rely primarily on raffles for income, nor should you run a raffle with any regularity. It is recommended that organizations to not operate more than one raffle every three months or a maximum of four raffles annually. Beware of organizations cloaked as non-profits operating charitable gaming on a regular basis for either their own behalf or the behalf of other non-profits. Non-profits must operate and manage their own charitable gaming and balance their revenues with other fundraising activities.
Non-profit organizations are required to report raffle prizes if the prize is at least 300 times the amount of the ticket price and the amount of the prize, minus the ticket price, is over $600. If this is the case, the organization must file Form W-2G with the IRS, and give a copy to the person who wins the prize. Further, the winner must report their prize income on Form 5754.
For winnings over $5,000, the non-profit must withhold 25 percent of the income and report this amount to the IRS on Form W-2G. If the prize is not a cash prize, and the fair market value is over $5,000, the winner must pay 25 percent of the value to the non-profit, minus the cost of the ticket entry. Further, if the winner does not submit his or her Social Security Number or other tax number to the organization, and the raffle prize must be reported, then the non-profit must withhold 28 percent of the prize income. This is known as backup withholding. In addition to Form W-2G, the non-profit must report the withheld income on Form 945, Annual Return of Withheld Federal Income Tax.
With few exceptions, the IRS considers income from raffles to be unrelated business income. For most activities that a non-profit engages in, they are exempt from taxation on their income. However, for activities that are unrelated to the non-profit's exempt purpose, it must pay taxes on that portion of the income. Although a raffle may ultimately go to pay for exempt activities of a non-profit, running a raffle is not substantially related to the non-profit's exempt purpose. This means that non-profit organizations must pay taxes on income from a raffle.
It is illegal for non-profits to regularly engage in charitable gaming, or for charitable gaming wages to provide regular and essential income to an organization. Therefore, your organization should not rely primarily on raffles for income, nor should you run a raffle with any regularity. It is recommended that organizations to not operate more than one raffle every three months or a maximum of four raffles annually. Beware of organizations cloaked as non-profits operating charitable gaming on a regular basis for either their own behalf or the behalf of other non-profits. Non-profits must operate and manage their own charitable gaming and balance their revenues with other fundraising activities.
Sweepstakes and Giveaways
Sweepstakes entry must be free for all participants without any elements of consideration, and may not be attached to purchases of goods and services for promotional giveaways. Sweepstakes are governed by a completely separate set of jurisdictional laws, rules, and regulations, as well as separate reporting and tax filing requirements. To qualify as a sweepstakes, there must be equality among entrants with regards to (i) method of entry, (ii) opportunity to win, (iii) claiming prizes, and (iv) prizes awarded. This is referred to as "Equal Dignity," and must be present for a giveaway not to qualify as a raffle or lottery. All methods of entry must provide the same chance of winning, and no method of entry may give an entrant more entries than other entrants. Sweepstakes and giveaways that violate Equal Dignity Principles are simple not legal.
BEWARE OF ILLEGAL OPERATORS
There are a multitude of illegal operators on the internet these days, from small to large. Don't be fooled, the liability will ultimately fall on your organization. It is simply illegal to sell Raffle Tickets on or through the Internet without a system that is able to establish policies and procedures that are reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions. If a fundraiser comprises a PRIZE, CHANCE, and CONSIDERATION then it is a raffle and NOT a sweepstakes or giveaway. Play by the rules and report these illegal operators before they ruin it for everyone else while they profit at your expense.
DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here.
Visit us at RaffleAmerica.com to learn more.
Visit us at RaffleAmerica.com to learn more.