Raffles in California
By Christen Lee, Esq.
Although raffles can be a great fundraising opportunity for some nonprofits, most states consider raffles to be a type of illegal gambling. Many states, including California, carve out an exception for nonprofits. The following is a brief summary of the California exception.
Charitable Raffles in California
California Penal Code section 320.5 carves out an exception to the general prohibition against gambling in California. This exception allows “eligible organizations” to “conduct raffles for the purpose of directly supporting beneficial or charitable purposes or financially supporting another private, nonprofit, eligible organization that performs beneficial or charitable purposes if the raffle is conducted in accordance with this section.”
Definition of an eligible organization
Generally, an eligible organization is a private nonprofit organization that is exempt from California income tax and has been qualified to conduct business in California for at least one year prior to conducting a raffle.
Definition of a raffle
A raffle is a scheme to distribute prize(s) by chance among people who purchase paper tickets that provide the opportunity to win the prize(s). The paper tickets must have a detachable stub/coupon. Each paper ticket and its corresponding stub/coupon must have a unique and matching identifier. The prizes are awarded by a random drawing from all the purchased tickets; the drawing must be conducted under the supervision of a natural person who is at least 18 years old.
Note: California law prohibits raffles from being operated or conducted over the Internet, although the organization conducting the raffle may advertise the raffle over the Internet. Also, federal law prohibits multi-state raffles, so a nonprofit should only sell tickets inside California.
The 90/10 rule
At least 90 percent of the gross revenue from the sale of raffle tickets must be used to benefit or provide support for beneficial or charitable purposes. “Beneficial purposes” excludes purposes that are intended to benefit officers, directors, or members of the eligible organization. The funds may not be used to fund any beneficial, charitable, or other purpose outside of California.
Registration and reporting requirements
Unless specifically exempted, nonprofits that want to conduct raffles must register with the California Department of Justice. They also have to comply with annual reporting requirements to disclose information such as gross raffle ticket sales, expenses, and how the revenue was spent. Registration and reporting forms are available at http://ag.ca.gov/charities/raffles.php.
Educational institutions, religious institutions, and hospitals are exempt from raffle registration and raffle reporting requirements but must otherwise comply with all the other regulations.
Taxes and withholding
A raffle ticket purchase is not tax-deductible. Prizes are considered taxable income to the winners.
Mailings and advertisements
The Federal Deceptive Mail Prevention and Enforcement Act prohibits deceptive mailing practices for sweepstakes, contests, and raffles. If the nonprofit plans to use the U.S. Postal Service to mail advertisements or raffle tickets, it must comply with this act, which requires certain disclosures on each mailing. When drafting the raffle rules, it is helpful to include these disclosures in the raffle rules. For more information, see http://www.dmaresponsibility.org/Sweepstakes/.
