[March 28, 2012] For many independent schools and other non-profit organizations and charitable causes, raffles are a common and fun way to raise funds. However, in most states, raffles are considered a form of gambling or gaming and, as such, are subject to state regulation.
Each non-profit organization should determine whether a raffle is permitted in its state and, if so, whether state-specific legal requirements apply. Failure to do so could trigger an investigation by the state Attorney General (or other legal authorities) and expose the organization to a burdensome audit.
While some states ban gambling in any form, others allow certain non-profit organizations to hold raffles. In Massachusetts, for instance, the following organizations are permitted to host a raffle for fundraising purposes:
• Certain veterans’ organizations;
• Churches or religious organizations;
• Fraternal or fraternal benefit societies;
• Educational or charitable organizations (including schools);
• Civic or service clubs; and
• Clubs or organizations operated exclusively for non-profit purposes.
Massachusetts law requires that all raffle proceeds be used for educational, charitable, religious, fraternal or civic purposes or for veterans’ benefits.
Notably, some states require a non-profit organization to have been in operation for a minimum period of time in order to hold a raffle. In Massachusetts, the organization must have been organized and actively functioning as a non-profit for at least two years.
Permitting And Licensure Requirements
Many states require a non-profit organization to obtain a permit or license before conducting a raffle. In Massachusetts, a non-profit organization must obtain a raffle permit from the clerk of the city or town in which the raffle is going to be held. The permit application must be endorsed by the city/town chief of police, and copies of the permit must be provided to the Massachusetts Commissioner of Public Safety and the Lottery Commission. In addition, some states require financial reports to be submitted to certain state and local agencies after the raffle has been held.
Most states impose yet additional requirements, which vary from place to place. For instance, in North Carolina, a non-profit organization is limited to hosting only two raffles per calendar year. Other states limit who can operate the raffle on behalf of the non-profit organization, as well as who can purchase raffle tickets or win the raffle prize.
Massachusetts law imposes an unusual “advance notice” requirement concerning the amount of the raffle prize. If the prize is cash, or if a portion of the prize is to be derived from the raffle’s proceeds, such as in a “50/50” raffle, then ticket purchasers must be notified in advance of the specific amount of the prize. Thus, while the prize in a typical “50/50” raffle is 50 percent of the raffle proceeds to be determined when the raffle is over, this arrangement is unlawful in Massachusetts.
Taxes On Raffle Proceeds
Raffle proceeds may be subject to state and local taxes. In Massachusetts, a non-profit organization is required to pay a five percent (5%) tax on the gross proceeds of the raffle. Depending on the prize amount, the raffle host may also need to complete a federal Form 1099-MISC for the prize winner.
Recommendations For Non-profit Organizations
We recommend that independent schools and other non-profit organizations confer with counsel to determine whether a proposed raffle is permitted by state law, and more specifically, to determine the answers to questions such as whether the organization:
• Has been in operation for the required number of years;
• Must obtain licenses or permits from local and/or state agencies;
• Can offer a cash prize derived from raffle proceeds, such as in a 50/50 arrangement;
• May have state and/or federal tax obligations based on raffle proceeds; and
• Must meet any additional requirements in order for the raffle to be legal.
If you have any questions about your state’s raffle laws or would like guidance in connection with a non-profit organization’s fundraising methods, please do not hesitate to contact us.