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Help Desk FAQ: What Do I Need to Know About Nonprofit Raffles? Don’t Gamble with Compliance and Reporting

by Guest Blogger

Raffles can be a fun and effective way for nonprofit organizations to engage the public and raise funds to support the organization’s cause. Raffles are common at school events as well as other nonprofit fundraisers, and they give the public the opportunity to contribute money to a great cause while enjoying the chance to win prizes, whether it be a cash prize or otherwise.  However, from the perspective of the nonprofit, there are legal considerations to holding raffles on both the state level and federal level.  Additionally, raffles are considered a game of chance and can be subject to gambling control regulations. The following are both the state and federal rules to be mindful of when holding a raffle in Maine.

Maine Raffle Rules

In general, organizations that hold raffles are required to register with the Gambling Control Unit; however, there are exceptions applicable to Maine nonprofit corporations that hold in-person raffles.  An organization is not required to register with the Gambling Control Unit under the following circumstances:

  • The Raffle prize with a value of $10,000 or less (which is applicable for both cash and noncash prizes) and the raffle is conducted by an “Eligible Organization.” (An “Eligible Organization” is defined as (i) an agricultural society; (ii) a bona fide nonprofit charitable, educational, political, civic, recreational, fraternal, patriotic or religious organization; (iii) a volunteer fire department; or (iv) an auxiliary of one of the organizations listed).

An Eligible Organization may conduct a raffle, but shall be required to register with the Gambling Control Unit to conduct the Raffle if there is a noncash prize up to $75,000 or a total cash prize of $20,000,but no more than $10,000 in cash per “winning chance”.

  • Thus, if an Eligible Organization registers with the Gambling Control Unit, it can hold a raffle with a non-cash prize valued up to $75,000, or
  • If an Eligible Organization registers with the Gambling Control Unit, it can hold a raffle where the winning chances equal up to $20,000 total, but each winning chance cannot be for more than $10,000 in cash.

Some additional rules for Maine Raffles are as follows:

  • Raffle tickets cannot be sold by individuals under 18 years of age except for Raffles conducted by Eligible Organizations designed to benefit activities of children at an event generally attended by persons under 18 years of age.
  • An Eligible Organization may hold more than one Raffle at a time without registering with the Gambling Control Unit as long as the prize of each “winning chance” is equal to or less than $10,000.
  • An Eligible Organization may not hold more than one registered Raffle when the value of the noncash prize is between $10,000 and $75,000.
  • An Eligible Organization may not hold more than one registered Raffle when the value of the cash prize is between $10,000 and $20,000.
  • An Eligible Organization may simultaneously hold one registered Raffle when the value of the noncash prize is between $10,000 and $75,000 and one registered Raffle when the value of the cash prize is between $10,000 and $20,000.
  • Internet Raffle: An Eligible Organization may conduct an Internet raffle if the eligible organization registers with the Gambling Control Unit, the raffle is conducted by a licensed Internet raffle operator identified on the Internet raffle application form, and the Eligible Organization completes the applicable questions on the application to the satisfaction of the Gambling Control Unit. The Eligible Organization and Internet raffle operator may not permit a person under 18 years of age to purchase a raffle ticket and may not advertise or market the Internet raffle in a manner that has a high possibility of reaching persons under the age of 18.

Federal Rules

From a Federal compliance standpoint, non-profit organizations must be mindful of the IRS reporting and withholding requirements.

  • An organization must report the prize amount paid to the IRS if the prize minus the ticket price is $600 or more and the payout is at least 300 times the amount of the wager.
  • An organization that pays winnings to an individual of more than $5,000 is required to withhold and submit to the IRS 25% of the winnings. Winnings are defined as the prize amount minus the cost of the raffle ticket.
  • For noncash prizes with a fair market value over $5,000 the winner may be required to pay the organization 25% of the value of the prize so that the organization can pay the required “withholding” to the IRS. For this reason, in such circumstances, many organizations include a cash prize with the noncash prize to cover the tax withholding, in which case the cash prize adds to the prize value and the actual withholding is equal to 33% of the noncash prize.
  • An organization uses the Form 945 to report and send withheld payments to the IRS.

Unrelated Business Income Tax (UBIT)

Generally, nonprofit tax-exempt organizations are exempt from tax from most activities that they engage in.  However, the IRS considers certain income from activities, such as gaming (including raffles) to be unrelated business income tax (UBIT).  However, there are some UBIT exceptions.  An analysis of UBIT rules is outside of the scope of this article.  However, a tax-exempt nonprofit that holds raffles should consult with a legal or tax professional to seek guidance regarding whether the income from the raffle will be subject to income tax.

Consequences

  • Violations to Maine laws regarding gaming are potential criminal offenses.
  • Failure to abide by IRS withholding rules can result in penalties and unanticipated tax bills to the organization.

Summary

Raffles can be a great way for nonprofit organizations to raise funds, and they can be a great deal of fun for all involved.  However, it is important to be mindful of Maine’s raffle rules and the IRS’s withholding and reporting requirements when deciding to hold a raffle since the consequences for non-compliance can be administratively and financially burdensome.

Additional Resources + Information

If your organization has been impacted by regulations around raffles, please reach out to MANP’s Public Affairs Manager, Mary Alice Scott, at mascott@nonprofitmaine.org to let MANP know.

About the Author

Andrew Wells, JD, LLM, Associate Attorney
Andrew is a senior associate at the law firm, Bernstein Shur, and works out of its offices in Portland, Maine. Andrew graduated from the University of Maine Law School and also has an LL.M in Taxation from the University of Florida Levin College of Law, consistently one of the top three tax programs in the country. Andrew is part of Bernstein Shur’s business law practice group and works with a wide variety of non-profit and tax-exempt organizations from the early start-up stages of incorporation and beyond. Andrew lives in Durham, Maine with his wife, three young daughters, and two small dogs.

Disclaimer:

This article has been prepared and made available by Andrew Wells for informational purposes only.  This article does not constitute legal advice on any matter, nor does receipt of the article create an attorney-client relationship with Mr. Wells or Bernstein Shur. No recipient of this article should act or refrain from acting on the basis of any information in this article without seeking legal advice on the particular facts and circumstances at issue from an attorney licensed in the recipient’s state.

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