Charitable organizations often raise funds through gambling activities, such as bingo, raffles, casino nights, and drawings authorized by state law. Unfortunately, many charities proceed with such fundraisers without considering the requirements and limitations of federal, state, and local laws and the potential penalties that may be imposed when the applicable rules are not followed. Federal, state and sometimes local law regulate charitable gaming activities. Federal law restrictions arise from the organization’s tax-exempt status. State law restrictions arise from prohibitions on gambling activities, as well as state charitable solicitation laws. Local laws may also impact gambling activities.
Such status affords both exemption from federal income tax and the much-desired qualification to receive tax-deductible contributions. With these benefits, however, come a number of restrictions and reporting obligations that may impact the organization’s gaming and other fundraising activities. Impact of Gaming on Tax-Exempt Status. The IRS generally views gaming as a trade or business that is not substantially related to any charitable purpose. All tax-exempt organizations must maintain complete books and records so that they can satisfy their reporting obligations and determine any tax liabilities that they may have. Organizations that engage in gaming activities must maintain records of gross receipts from gaming, prize payouts, and other related disbursements to substantiate information submitted on their annual returns filed with the IRS. 15,000 in gross revenues from gaming activities are required to complete Part III of Schedule G, Supplemental Information Regarding Fundraising or Gaming Activities. Reporting Winnings and Withholding Income Taxes. The charity may also be required to withhold income taxes from the winnings.
With limited exceptions, the laws of the fifty states and the District of Columbia make it a crime for any person or entity to conduct gambling activities. As an exception, charitable organizations are permitted to use gambling activities to generate funds to advance the organization’s charitable purposes. This charitable-gambling exception, however, is subject to restrictions and regulation. Authorized games typically include bingo, raffles, pull tabs, and drawings. Most states preclude Eligible Organizations from conducting traditional casino-style gambling, such as blackjack, craps, roulette, or slot machines, although a few states permit Eligible Organizations to offer casino nights. The proceeds from such charitable gambling operations must be used for the organization’s charitable, public interest, or religious purposes. In addition, many states limit where charitable games may be played to the physical location of the Eligible Organization or to a location leased by the Eligible Organization.
Most states will review the appropriateness of the physical location when deciding to award a charitable gambling license. States restrict the amount of prizes that may be awarded by an Eligible Organization. 5,000 in total prizes may be awarded in raffles during any one-month period. To be an Eligible Organization, the nonprofit must submit an application to the appropriate state or local licensing agency and pay a license fee in order to obtain a license to offer charitable games. Charities that raise funds through gambling activities also must consider whether such activities will trigger the state charitable solicitation laws where they operate. Most states have laws that regulate solicitations for charitable contributions. Complying with state charitable solicitation laws can be a particular challenge for charitable organizations that engage in gambling or other fundraising activities in multiple states. For example, a charity may solicit donations by telephone, mail, or e-mail in more than one state, publicize or hold fundraising events in more than one state, or post a solicitation request on its website.
The burden of complying with the charitable fundraising regulations of multiple states may be eased to a degree through the use of a standardized registration form. Charitable Organizations in lieu of the state registration form. Failure to comply with the state charitable solicitation laws can have serious consequences. Although the sanctions vary from state to state, they may include both civil and criminal penalties for noncompliance, with potentially hefty fines. Gambling activities are an effective way for charities to increase public awareness of their causes and to raise funds to support their activities. Organizations that engage in charitable gambling activities without considering the many federal and state restrictions and conditions on gambling risk substantial penalties and negative publicity. Texas Hold-Em Poker and other card games, raffles, scratch-offs, casino nights, and coin-operated gambling machines such as slot machines or video blackjack or poker. For purposes of the Form 990 or Form 990-EZ, gaming does not include fundraising events in which participants can play casino-style games for non-cash items donated to the organization.