Charity Raffles – Tread Carefully


As the recession deepens, we get more and more creative ideas from people wanting to conduct complex raffles. In Arizona, the most popular questions this year involve raffles of real estate. While raffles can be great revenue generators for charitable organizations, many charities do not realize that in most states, including Arizona, raffles are illegal gambling. Cautionary tales abound. Most states have specific exceptions for charitable raffles but require the charity and the raffle to meet specific criteria to qualify. For example, a raffle is not gambling in Arizona if:

  • it is sponsored by a nonprofit that has been in existence for 5 years;
  • no insider receives a direct or indirect pecuniary benefit other than participation on an equal basis with all other participants; and
  • no person participates directly or indirectly in the management, sales or operation of the raffle other than the non-profit’s employees and agents.

Many jurisdictions require non-profits to obtain a permit to conduct a raffle. Permits can take weeks or even months to process. In addition, there are number of tax issues that must be considered when planning a raffle. Tax issues include the following:

Deductibility of Ticket Price.  A ticket purchaser has not made a deductible gift. The consideration paid is considered equal to the “chance” to win a prize therefore there is no disinterested gift and therefore no contribution deduction.

Deductibility of Prizes Contributed. Those contributing prizes to the raffle may be entitled to a deduction depending upon whether the contribution is an interest in property (as opposed to a non-deductible service or right to use property). The charitable deduction for in-kind contributions that are raffled off in support of a charity are generally going to be limited to the taxpayer’s basis in the property (rather than fair market value).

Non-profit’s Obligation to Report Prize Income.  The prizes are taxable income to the winners so the non-profit must ensure it properly reports the raffle prizes to the I.R.S. Generally, raffle prizes must be reported on Form W-2G with a copy to the winner if  a) the amount paid, reduced by the amount the person paid for the chance to win a prize, is $600 or more;  and b) the payout is at least 300 times the amount of the wager.

Non-profit’s Obligation to Withhold from Prize Income. If the fair market value of winnings amount to more than $5,000, the non-profit must withhold taxes from the winnings and report this amount to the I.R.S. on Form W-2G. The non-profit  is liable for any tax it fails to correctly withhold.

Back-up Witholding.  If the prize is reportable (the amount paid, reduced by the amount the person paid for the chance to win a prize, is $600 or more; and b) the payout is at least 300 times the amount of the wager) and the winner fails to supply a taxpayer identification number, then the Foundation must withhold 31% of the total proceeds.

Federal Laws.  If the non-profit plans to use the U.S. mails for any part of the raffle – e.g. for mailing entry cards or raffle tickets – there are federal laws and regulations that bear consideration. Also, the FTC is empowered to regulated certain types of sweepstakes and contests.

Non-profits sponsoring raffles should consider creating raffle rules and treating them as contracts. Drafting detailed rules permits the non-profit to set defined limits on the giveaway – who may participate, what laws apply, warranty and liability disclaimers, etc. Raffle rules also provide a way for non-profits to cancel or modify their obligations in the event that too few tickets are purchased or there are other technical problems. We have also advised non-profits running raffles to have the raffle winner (or winners) sign an affidavit of eligibility and a release of liability. This is a good place to ensure the winner understands his or her tax reporting obligations and is eligible to accept the prize.

Constructing a legal and compliant raffle takes time and may require the advice of a professional. Non-profits that take care to do it right will avoid embarrassing and costly legal mistakes and have a model that they can use to raise funds again and again.

Ellis Carter is a nonprofit lawyer with Caritas Law Group, PC. To contact Ellis, call 602-456-0071 or email us at

20 Responses to Charity Raffles – Tread Carefully

  1. Really interesting and worrying. I have posted a link to this on my blog and wonder if the same problem is happening outside the US. Hopefully there won't be many worthy charities hit by this.

  2. The article was really helpful. What happens if you want to do a raffle for a for Profit company anyone know? Does it have to be noprofit to do a raffle?

  3. my org. was just approved as 501 c 3 this year and our financial showed a small income from raffles held at our monthly meetings and it was approved by the IRS once we explained the tickets were sold only to members and the prizes were used donations from members. We take in less than $50 and is only a few times a year…our org is only 2 years old. Based on this would we have to stop the raffle for another 3 years?

  4. in the state of CA can a commercial co-venturer conduct a raffle for a non-profit under current CA law?

  5. my husband just won a 1927 ford replica in an Ariz. raffle by a non profit. we understand the income tax both state and federal but the builder of car says we also owe sales tax to him. would this be correct? the builder of the car and the organization who raffled it are two separate entities.

  6. We held a raffle last year, with the prize being a car which had been donated to our organization. The FMV of the car is anywhere between 11k and 17k, so we must report to Arizona and IRS. Do we have to use form w2g, or can we report on 1099-misc? It appears that we have to collect the 28% tax from the winner and send to the IRS. Is that correct? The instructions for the w2g are unclear on how to report this type of winning. Thanks for any help you can give!!!

  7. I would like to know if it is feasible to rafle my River Home (in Arizona) with the amount over what I get, to go to non profit organizations. Example:

    Sell 20,000 tickets for $100 each. $1,200,000 to me for the house & the balance ($800,000), to go to specified nonprofit organizations. Z

  8. Hi, if a non profit corporation runs a multi-state lottery, via internet and mail delivery of tickets, and dramatically misstates the odds of winning, have they broken any laws?


  9. Hi, if a non profit corporation runs a multi-state raffle, via internet and mail delivery of tickets, and dramatically misstates the odds of winning, have they broken any laws?


  10. Hi,
    I want to use a raffle to start a non-profit/charity. Can you use this method of raising money to also pay the salary of an employee of non-profit?

  11. Are organizations like schools and or churches in Arizona allowed to do raffles as a Fundraiser if the prizes given out are under $100? What needs to be done to allow raffle tickets to be sold to raise funds for their school?

  12. Can a school or church conduct a Fundraiser where they sell raffle tickets if the prizes given away are under $100 each?

  13. In the past I have worked with organization which would do what we called an “opportunity drawing”.

    No purchase was necessary to win because if the person asked for a ticket without donating to the cause they were given one ticket without payment. One ticket only which was placed in the barrel with all the others. Generally people don’t even ask for the free ticket if the like the cause, but if they do we give them one. Other tickets are given on a sliding scale depending on the amount of money the Doner wishes to give, such as 3 for $5, 7 for $10 and 15 for $20. At the end of the event each item to be given would have a ticket drawn from the barrel by someone in the crowd and the item awarded to the person named on the ticket

    I now volunteer for a 501c3 here in Arizona and am hoping this same type of drawing could be used to raise small amounts of funds without running afoul of the laws. Our organization is new and awaiting our determination letter and have not been in existence for five years.

  14. Ellis, we are a church in Arizona in existence since 1976. We are asking for a $1 donation, and have several prizes available to persons who purchase a ticket- goal is to raise around $7500. The proceeds will be used to further programs for children, youth and families. Dinner is included in the price of the ticket. Should we refer to prizes as “door prizes” in your opinion, please?

  15. If either a charitable organization or booster/civic club holds a 50/50 raffle and the winnings are split between a sponsored benefactor (needy family, etc) and the drawing winner, is this illegal or does it fall under the small raffle definition? If the winnings cap is $500, do taxes need to be withheld or since that is under the threshold, everything is fine? Let’s say the winnings of the benefactor doesn’t go directly to them, but instead pays for medical care or some other service to help them? Please advise.

  16. We’re a new non-profit organization and we’re considering running a raffle for a motorcycle. Our organization is based in PA, but we’d like to offer the raffle to people in PA/NY/NJ/MARYLAND/CONN (all the areas we have influence in). Is it legal to offer our Raffle on our website as long as we have a valid gaming license and permits for each state, including PA since we reside in PA?

  17. As a dovetail on my previous question – can we start to promote a raffle (ads, facebook promotions, selling tickets, etc..) without having the gaming license or permits in place for all the states yet or do we need to wait until we have all licenses and permits in place before we actually start promoting the event. The key question is does the IRS and local agencies view a raffle when the item is won and awarded or do they view the raffle as active the moment a ticket is sold, or once the raffle is promoted?