Hosting a giveaway (technically not a legal term, but it’s used interchangeably with the term sweepstakes) is not only a great way to promote your blog or a product, but also it’s a great way to build followers and build great relationships with sponsors. As a host it’s your responsibility to make sure your sweepstake is legally set up. You definitely want to avoid turning your sweepstake into a lottery. The laws governing the sponsorship and hosting of social media promotions are widely overlooked or misunderstood. Below is a brief overview of the laws and tax implications you need to know to avoid placing your business at legal risk.
Generally speaking, there are three types of online promotions:
Beginning with lotteries which are random drawings for prizes wherein participants have to pay to play. Let’s look at the three components of a lottery:
1.) Prize, what you are giving away
2.) Chance, the element of luck involved in winning the prize, and
3.) Consideration, something of value.
For example from a bloggers standpoint, if you require someone to follow you or like your blog or page (consideration) for the probability (chance) to win a tablet (prize) that would place your giveaway into the lottery category which is so much more highly regulated (with the exception of state‐run lotteries and authorized raffles). You also cannot charge a fee or make someone purchase something for someone to enter your promotion or it will be considered a “lottery.” You must make certain that your giveaway does not contain all three of these components. Of course hosting a giveaway you will be expected to have a prize and a chance, so you need to avoid having those who enter exchange consideration for the chance to win. So before considering having a “giveaway” you may want to consult with a legal consultant or check with your state to ensure compliance with their laws as well as with federal agencies.
The majority of bloggers usually run what you would call sweepstakes, meaning they give prizes away by choosing the winner by random drawings or chosen predominately by chance. Then you have contests, which is a promotion in which entrants win a prize based on merit or skills and prizes are awarded based on a judging panel or a voting process (for example, the best poem or the winner of a trivia game). No matter which option you choose whether it’s a Sweepstake or a Contest you must have official rules. Two of the most used statements in the rules are “no purchase necessary” and “void where prohibited by law.” Check out this link via SBA.gov: How to Use Contests, Sweepstakes, and Giveaways as Marketing Tools – While Staying Within the Law. Now as you know I am an EA and not an attorney so the information contained herein is not intended to constitute legal advice or a legal opinion as to any particular matter and I urge you to consult with an attorney concerning your own situation and any specific questions you may have. The contents are intended for general information purposes only from my own experience dealing with clients, by preparing the correct tax forms to send to the recipients of the winnings/prizes and assisting the business in filing their own forms to the correct agencies.
Knowing which social media promotion you are running or hosting, whether it be contests, sweepstakes, raffles, drawings, giveaways, or freebies will have tax implications.
Sponsors of lotteries, sweepstakes, drawings and raffles that are considered gambling must send the recipient a W-2G if the recipient’s cash winnings and/or the Fair Market Value (FMV) of prizes such as cars and trips are $600 or more and at least 300 times the amount of the wager. Also, you must withhold at a 25% rate if the winnings minus the wager are more than $5,000 of gambling winnings for federal income tax.
Sponsors of contests and sweepstakes are required to send the recipient a 1099-Misc if the recipient’s cash winnings and/or the Fair Market Value of merchandise won are $600 or more and do not involve a wager.
Eligibility might be further limited to particular states within the United States that have relatively more rigorous legal requirements, which includes:
- Florida – sponsors of promotions in which the total value of the prize exceeds $5,000 must file a copy of the rules and a list of all prizes at least seven days before the promotion begins and submit proof of either a trust account or surety bond equivalent to the sum of the prizes offered. Promotions based in other states must be filed if they are open to Florida residents and have prizes valued at more than $5,000.
- New York – the filing requirement are an issue when the total value of the prize exceeds $5,000. If that is the case the sponsor must file with the Secretary of State at least 30 days prior to the start of the promotion along with a statement setting forth the official rules and regulations and create a trust account, certificate of deposit or surety bond in the amount of the offered prize.
- Rhode Island – the filing requirements begin when the promotion is offered at a retail establishment and the value of the prize exceeds $500. Rhode Island does not require the posting of a bond.
There may be filing fees associated with submitting the required information to these states along with other professional fees needed in the assistance of completing these tasks (lawyers, brokers, etc.) – these fees are considered business expenses, so they can be deductible on your tax return.
In addition to structuring sweepstakes and contests to comply with federal and state laws, companies must pay attention to the promotion terms and conditions of social media networking sites. Check out their promotion guideline agreements.
I hope the information that I’ve shared was helpful. Again, the information contained herein is not intended to constitute legal advice or a legal opinion as to any particular matter and I urge you to consult with an attorney or your state/federal regulators concerning your own situation and any specific questions you may have.
Debbie Thomas, EA, NRB