Raffles can be a simple, effective tool for enticing people to give to a charitable organization. However, before you start selling tickets, be sure you’re aware of the rules in your state. The regulations discussed here are specific to Texas, and may or may not be different in other states. A raffle, for purposes of this article, is defined by the Attorney General as the award of one or more prizes by chance at a single occasion among a single pool or group of persons who have paid or promised a thing of value for a ticket that represents a chance to win a prize. Here are a few things to keep in mind before your next raffle:
Must be a qualified organization. Generally, only the following types of organizations can hold a raffle:
- A nonprofit organization that has existed for at least three preceding years and is exempt from federal income tax under IRC Section 501(c); does not distribute any of its income to its members, officers or governing body; does not devote a substantial part of its activities to attempting to influence legislation; and does not participate in any political campaign
- A nonprofit association organized primarily for religious purposes that has been in existence in Texas for at least 10 years
- A nonprofit volunteer emergency medical service or fire department that does not pay its members more than a nominal compensation
Only two raffles per calendar year. A qualified organization may not hold more than two raffles in any given calendar year. An organization must consider all programs, including fiscal sponsorship arrangements, when planning raffles for the year. If your organization acts as a fiscal sponsor for a project, be sure everyone is aware of the rules. It’s a good idea to implement an organizational policy stating that all raffles must be approved by a central source so that the organization can manage fundraising efforts and use the two raffles wisely. It’s also important to note that multiple raffles cannot be held at the same time. Ticket sales for each raffle must have separate and distinct timeframes that do not overlap. Organizations are not required to register with the state in order to conduct a raffle.
Ticket disclosures. You can’t use just any ticket for raffle sales. Each ticket must show the following information:
- Name of the organization conducting the raffle
- Address of the organization conducting the raffle
- Ticket price
- Description of each prize with a value in excess of $10
- Date the prize(s) will be awarded
Not a donation. Payments in exchange for raffle tickets are not a charitable donation! A donation is a gift for which the giver expects nothing in exchange. Raffles are considered a gambling activity, which means the ticket purchaser receives a chance to win a prize in exchange for their payment. If a person intends for the payment to be a donation, they must not receive any raffle tickets in exchange for the payment.
Limits on value of the prize. If the qualified organization purchases the prize, the value may not exceed $50,000. Prizes donated to the organization are not limited in value. Money may not be offered as a prize; this includes coins, paper currency and gift cards.
Tax reporting. If the value of the prize is $600 or more, you should get a completed Form W-9 from the winner prior to handing over the prize. Form 5754 may be required if the winnings are to be shared by a group of individuals who joined together to purchase the winning ticket. The organization conducting the raffle is required to file Form W-2G if the prize is worth $600 or more and at least 300 times the amount of the wager. If the prize is valued at more than $5,000, the organization must withhold federal tax. For noncash prizes, the winner must pay the organization 25% of the value of the prize minus the amount of the wager. The organization conducting the raffle can choose to pay the tax withholding for the winner, but the withholding is increased to 33.33%. The withholding amount is added to the value of the winner’s prize on Form W-2G. If a winner does not want the tax burden of the prize, they should refuse to accept the prize rather than giving it back to the charity as a donation. The donation scenario would require a legal transfer of the prize, which creates the tax consequences discussed above.
Other considerations. Raffles may not be promoted statewide or via paid advertisements in mass media. No one may be compensated for selling raffle tickets.
