So somehow Ellis Carter’s Charity Law Blog fell off the feed I receive. I have since fixed that and rediscovered my delight at all the interesting and useful content she provides.
Back in July she had a great post on the various mistakes charities make in running their charity drawings. Most charities will avoid the prohibition on lotteries by providing a method to enter without purchase.
However, in order to avoid running afoul of regulators, everyone has to have an equal chance at winning. If someone gets more entries by donating more money, a regulator view that as a consideration required to win and the sweepstakes becomes reclassified as a unlicensed lottery according to Carter.
Marketing copy can undo your own rules just as easily. We regularly see charities include the mandatory “no purchase necessary; a donation will not increase your odds of winning” language in the official rules, then market the exact opposite everywhere else on the same page: “the more you give, the more entries you get,” “triple your chances,” and so on. If your own marketing tells donors that giving improves their odds, you’ve handed a regulator, or a plaintiff’s attorney, the argument that your official rules are fiction
Another thing she points out is that donations which gain someone a chance to win are not tax-deductible. Unlike with tickets to a gala or fundraising event where the amount over the cost of the meal can be deducted, in most cases if the donation is tied to a chance to win then none of it is tax-deductible.
If a donor’s payment functions as the price of a chance to win, the IRS treats the donor as having received full consideration for that payment, the same rule that makes a raffle ticket non-deductible….
Where a chance to win is only a minor add-on to an otherwise ordinary payment, like a raffle drawing bundled into a gala ticket, the analysis softens into an ordinary quid pro quo problem: ….But charities that price entries per dollar given are much closer to the raffle-ticket rule than the gala-ticket rule, and they should stop telling donors their gifts are “fully tax-deductible” without qualification.
The post covers some other issues organizations running charity raffles may face. For example, in California, it is only a raffle if the ticket is paper with a detachable stub. You can’t have digital entries.
In some states, you have to register and file a bond once the prize reaches a certain dollar value threshold. This can vary by state. In Florida it has to be done in 7 days from. In New York, it is 30 days.
Reporting winnings over $600 has to be on a form W2-G, not a 1099. At a certain threshold, the charity is responsible for handling the withholding of federal taxes.
There are likely a lot of other nuances specific to states and municipalities. These are just some of the things Carter advises people to pay attention to. I’m not a lawyer like she is and I am sure she would tell you to consult a source other than a blog for real advice.
