Legal Complexities of Raffle Fundraisers for Nonprofits
Raffle fundraisers for nonprofits are a common way for organizations to raise funds to support their mission. However, many nonprofits host a raffle fundraiser without realizing the legal complexities involved.
Currently, Oklahoma state law permits raffles by qualified organizations under 21 O.S. § 1051. However, the law states that the organization cannot hire or contract with someone to “conduct” the raffle, which is where confusion sometimes arises.
An Oklahoma attorney general opinion issued in April 2024 sought to clarify two primary areas related to the law:
1. Whether a qualified organization could use a third-party online platform for things like fulfilling ticket orders, processing payments, and providing a random number generator to select a winner; and,
2. Whether a salaried employee could be involved in conducting a raffle if they are not receiving additional compensation for doing so.
While the opinion provided some clarification around these two issues, it exemplifies that there are multiple issues organizations need to consider when it comes to raffle fundraisers for nonprofits in Oklahoma.
Know the rules for employee and third-party participation
The attorney general’s opinion acknowledged that a third-party platform could be used to help administer the raffle, so long as the qualified organization was still the one making all decisions related to conducting the raffle. It also acknowledged that a salaried employee could be involved in conducting the raffle, provided their participation is voluntary and they do not receive additional compensation tied to the raffle activities.
One important thing to note in this area is that fundraising consultants or event planners cannot be the ones promoting the raffle or taking funds for raffle tickets, as that falls under hiring someone to conduct the raffle. The organization must use volunteers or employees for those activities.
Pay attention to the details
There are two elements of the law that many organizations overlook when conducting raffle fundraisers.
First, every raffle must use numbered tickets. If you are using printed tickets, ensure they are properly numbered on both the portion that’s dropped into the raffle box and the portion that the purchaser retains.
Second, participation in the raffle is supposed to be a voluntary contribution. That means that if someone offers to pay less than the advertised raffle ticket price, the organization must accept their voluntary contribution for a raffle ticket.
Ensure proper valuation of raffle prizes
Valuation of prizes is another aspect some organizations struggle with in raffle fundraisers for nonprofits. Valuation is simple when the raffle prize is cash or a vehicle. Raffles for vacation packages and substantial gift baskets can be much more difficult when it comes to determining the value. The organization is responsible for getting a valuation of the raffle prizes and communicating to donors regarding both the valuation of such goods/services received by the donor and the amount of their raffle ticket purchase or participation that is considered charitable. Typically, raffle ticket purchases are not considered a deductible contribution.
Follow IRS reporting requirements for raffle winnings
Certain amounts of raffle winnings must be reported to the IRS on Form W-2G for gambling winnings. In addition, if an individual wins a raffle prize valued at more than $5,000, the organization is required to withhold 25% of proceeds for federal income tax. In the case of a non-cash raffle prize, that means collecting that percentage from the individual when they claim their prize minus the wager.
An example of thi is where Jason purchased a $1 ticket for a raffle conducted by X, a nonprofit organization. On October 31, 2024, the drawing was held, and Jason won a car worth $10,000 (fair market value). Because the prize exceeds $5,000 and the fair market value of the car is $10,000, the tax on the fair market value of the prize is $2,499.75 ($10,000 minus $1 ticket cost x 25%). Jason must pay $2,499.75 to X to remit to the IRS on his behalf. X would indicate the fair market value of the prize ($10,000) in box 1 and the amount of the withholding tax paid ($2,499.75) in box 2 on Form W-2G. If the organization doesn’t collect that amount, they are responsible for paying the withholding to the IRS. These expectations should be clearly communicated when raffle tickets are sold so that all potential winners understand the requirement for federal withholding. See IRS Notice 1340 for more on withholding requirements.
Consult with qualified professionals before any raffle
Any qualified organization planning to conduct a raffle fundraiser should work closely with their legal counsel and their CPA to ensure proper administration of the raffle to comply with Oklahoma state law. Even if your organization has been running a raffle for years, it’s a good idea to check with qualified professionals to ensure compliance each year.