Charitable Gaming Overview

August 2, 2010

Authored by: Keith Kehrer

As contributions and grants have decreased, many organizations must get creative to raise the necessary funds to further their exempt purposes.  One common method of raising additional funds includes gaming activities, such as raffles, sweepstakes, contests, and 50-50 drawings.  Before engaging in any gaming activities, however, it is critical for your organization to analyze applicable state and federal law.   For example, certain gaming activities are strictly prohibited under state law (e.g., such activities may constitute an illegal lottery).  Certain gaming activities may be permitted but are often limited to specific organizations, such as Section 501(c)(3) organizations.  In addition, most states impose registration, licensing, and reporting obligations before an organization may conduct gaming activities.  It is important to consult with a professional familiar with each applicable state’s laws before conducting gaming activities. 

With respect to federal tax law, the IRS warns that “[a]ll exempt organizations conducting or sponsoring gaming activities, whether for one night of the year or throughout the year … must be aware of the federal requirements for Income Tax, Employment Tax and Excise Tax.”  IRS Publication 3079, “Gaming Publication for Tax-Exempt Organizations”.  These issues include the application of the unrelated business income tax, the potential obligation to provide Form W-2G, Certain Gambling Winnings and/or withhold taxes, and the application of excise taxes imposed on certain forms of wagering.  In addition to tax implications, certain record keeping and filing obligations may be imposed.  Before initiating any gaming activities, therefore, it is also important to seek the advice of a tax adviser who is knowledgeable regarding these rules.  For additional information regarding the applicable federal tax laws, please see IRS Publication 3079, IRS Notice 1335, and IRS Notice 1340.