Understanding the Legal Landscape of Raffles, Sweepstakes and Charitable Gaming for Nonprofits

What This Is: Charitable gaming, such as raffles, sweepstakes, bingo, or casino nights, can be a fun and effective fundraising tool for nonprofits. However, these events come with a complex web of legal obligations.

What This Means: Failure to follow the rules can result in fines, tax issues, or even the loss of tax-exempt status. In this post, we break down key federal, state, and local compliance issues to help your nonprofit plan a successful and lawful gaming event.

Federal Oversight: What the IRS Requires

At the federal level, the IRS regulates how nonprofits handle income from games of chance.

• Raffles as Lotteries: raffles often meet the definition of a lottery; payment, chance and prize, which may result in Unrelated Business Income (UBI) unless an exemption applies.
• Tax Reporting: if raffle winnings exceed $600 and are 300 times the ticket cost, your nonprofit must issue Form W-2G to the winner and possibly withhold 25% for federal tax.
• Sweepstakes: sweepstakes typically avoid lottery classification because they usually don’t require payment. Still, they must comply with truth-in-advertising laws.

State-Level Complexity: Raffles vs. Sweepstakes 

While federal rules set the framework, most regulation happens at the state and local levels. 

Raffles: Tightly Regulated

State requirements for raffles vary widely, but common themes include:

• Licensing: most states require a permit or registration. Some states limit raffles to certain types of nonprofits (often 501(c)(3)s).
• Revenue Use: states like California require that up to 90% of raffle proceeds benefit charitable causes.
• Ticket Design: some states mandate what must be printed on tickets (e.g., drawing date, organization name).
• Prize Limits: certain prizes, like alcohol, may be prohibited, and maximum prize values may be capped.
• Public Drawings: many states require fair, public drawings supervised by a neutral party.
• Online Sales: rules vary, California bans them, while New York allows them with prior approval.

Sweepstakes: Fewer Rules, But Still Regulated

Sweepstakes are less regulated because they usually must offer a free entry option, avoiding the “consideration” element of a lottery. That said, your sweepstakes must:

• Clearly disclose rules, prizes, and odds of winning
• Avoid deceptive advertising
• In some states (e.g., NY), register and post a bond if prizes exceed a certain value (usually $5,000)

Spotlight: A Sampling of State-Specific Rules

Let’s take a closer look at how three major states, California, New York, and Illinois, regulate charitable gaming.

California

Under Penal Code Section 320.5, California has some of the strictest raffle rules:

• Must be a registered California nonprofit for at least one year
• Register with the Attorney General (Form CT-NRP-1) at least 60 days before your raffle
• 90% of proceeds must benefit charitable causes within California
• Tickets must be paper only (no online sales)
• File Form CT-NRP-2 annually by October 1

Sweepstakes are allowed but must clearly disclose that no purchase is necessary.

New York

New York’s Gaming Commission regulates charitable gaming:

• A license is required if net proceeds exceed $5,000
• Online ticket sales are allowed with approval
• Single prize limit is $300,000; alcohol prizes are banned

Sweepstakes with over $5,000 in prizes to NY residents must be registered and bonded.

Illinois

Illinois governs raffles under the Raffles and Poker Runs Act, but most oversight is local:

• Licensing is handled by counties or municipalities
• Nonprofits must be in operation for five years
• Local ordinances determine prize limits and reporting
• Raffle funds must be kept in a separate account and financial records retained for three years

Sweepstakes are generally legal if they avoid either consideration or chance. Registration is rarely required unless tied to charitable gaming.

Don’t Overlook Local Laws

Some states require county or city-level approval. For example:

• Colorado: raffles require state registration for nonprofits
• Georgia: you need a permit from the county sheriff
• Tennessee: you file with the Secretary of State

Ignoring local rules can lead to fines or even the cancelation of your event.

Know Your Reporting Obligations

Not a Charitable Contribution: raffle ticket purchases are not tax-deductible. They’re considered a transaction, not a donation. Make this clear to supporters.

IRS Form 990 and Schedule G: if gross raffle revenue exceeds $15,000, you must complete Schedule G, Part III when filing Form 990. This section covers receipts, prize values, and expenses. If you combine raffles with other events (like a gala), raffle-related income must be reported separately from the overall event.

Income Reporting for Winners: raffle winners must report the fair market value of their prize as income. Prizes over $600 trigger IRS reporting via Form W-2G. Prizes over $5,000 may require 25% withholding, especially for cash. For non-cash prizes, the winner may need to pay the withholding amount before receiving the prize. For example, if a painting is worth $8,000, the winner must pay $2,000 in taxes upfront. Being transparent about this with participants avoids surprises, and complaints, at your event.

Proper Valuation of Donated Prizes

Donated prizes must be valued accurately and included in your nonprofit’s reporting. Use appraisals or comparable sales when items aren’t easy to value (e.g., art, memorabilia). The donor may also need documentation for a charitable contribution deduction, but the nonprofit must still report the value as income if used as a prize.

Avoiding Unrelated Business Income Tax (UBIT)

Raffles may generate Unrelated Business Income if they:

• Are a trade or business
• Are regularly conducted
• Aren’t related to your charitable purpose

If your nonprofit holds frequent raffles unrelated to its mission, UBIT may apply. However, if volunteers handle the event, UBI is generally exempt from tax.

Compliance Checklist

Before your next raffle or sweepstakes, make sure you:

• Obtain all necessary licenses
• Research state and local laws
• Keep raffle funds in a separate account
• Report income properly on IRS forms
• Withhold taxes on large prizes
• Clearly communicate prize rules and winner obligations
• Consult a nonprofit attorney or accountant when in doubt

Final Thoughts

Charitable gaming can be a powerful fundraising strategy, but it’s legally complex. From federal withholding to local permits, there’s no one-size-fits-all rulebook. Done right, raffles and sweepstakes can boost donor engagement and revenue. Done wrong, they can damage trust and invite regulatory trouble. If you’re planning a gaming event, make sure your legal, accounting, and compliance bases are covered. Working with legal and tax professionals can help you avoid pitfalls and structure events to reduce liability.

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.