Tis the season. Some people like to use the phrase “Doing Well by Doing Good.” Early U.S. business magnates knew that financial benefits can come from philanthropy. In 1888, Cornealius Vanderbilt donated $250,000 (that’s six trillion dollars in today’s money) to the YMCA. General Electric, Ford Motor Company, U.S. Steel and Standard Oil, among others, made significant donations to the American Red Cross during its initial fundraising campaigns during the inaptly-named, War to End All Wars. And Andrew Carnegie spent more than 90% of his fortune on charitable activities and is said to have popularized the principles of charity and stewardship in 1899 when he published The Gospel of Wealth. With these precedents, it’s no wonder that last year U.S. corporate giving increased to over $20 billion and Foundation giving was a whopping $105 billion.
As a sweepstakes attorney, this raises (and begs) the question, can business and charities give sweepstakes entries in return for charitable donations?
Two no-no’s control sweepstakes law: lottery and gambling. While these concepts are similar, there is an important distinction between them. A lottery is when the elements of prize, chance and consideration are present in a promotion. Gambling is when one stakes something of value in return for the chance of winning a prize.
In the donation-sweepstakes context, a business or charity always has to provide a free method of entry (AMOE) along with a donation method to avoid being an illegal lottery. But even with an AMOE, they also have to give something of value in return for the donation to avoid being gambling. I call this the “hamburger principle.” McDonald’s can’t just run a promotion where a person either (a) gives them $1 to enter or (b) mails in a postcard to enter. If you are paying $1 to McDonald’s to enter, you have to get something of value – like a hamburger – in return. In this way, you are not paying (solely) “for the chance” to win.
Back to my question. It may be great if a business could solicit donations for a charity by running a sweepstakes, but unfortunately, state fundraising laws may prohibit or restrict this set-up because, under most state laws, if a business is receiving “any consideration” in return for soliciting charitable donations, it may be a “professional fundraiser” or “paid solicitor” subject to registration, bonding and reporting requirements. While reasonable people may believe that this “consideration” should be limited to when the charity is actually paying the business to solicit donations or when the business is taking a cut of the donations, unfortunately, state statutes are drafted broadly enough to potentially cover additional situations where the business just gets a “bump” in sales from its charitable efforts or just has a contract with the charity.
For example, the Connecticut statutes defines a “paid solicitor” as “a person who for any consideration … performs for a charitable organization any service in connection with which contributions are solicited by such person …” And the New York statute provides that a “professional fundraiser” includes one “who directly or indirectly, by contract, including but not limited to sub-contract, letter or other agreement or other engagement on any basis, for compensation or other consideration (a) plans, manages, conducts, carries on, or assists in connection with a charitable solicitation … in this state for or on behalf of any charitable organization, … (b) solicits on behalf of a charitable organization or any other person…” With this many contingent words, a business could almost be assured that a regulator can find some way to hold its feet to the fire.
Bottom line for businesses: Please consider the professional fundraiser/paid solicitor laws before embarking on a donations to charity sweepstakes.
Back to the gambling issue. While a charity can solicit donations for itself and a business may be able to find a way to solicit donations to charity via a sweepstakes, there has to be a “hamburger” provided to the donating entrant. This could be a problem for a business, since as a for-profit entity, it doesn’t provide a tax deduction to the donor for his/her donation to charity. But it could even be a problem for a charity running a donation sweepstakes, since the charity could be hard-pressed to explain to a state regulator that donors receive a “hamburger” in return for their donations and do not just wager their money for the chance to win.
Unfortunately, we may not have a definitive answer. For example, when examining the legality of “pull-tabs” games – where an person buys a worthless game piece (or pull-tab) to enter for a chance to win a prize – the Alaska Attorney General recognized the hamburger principle by nothing the “critical difference from other promotional sweepstakes, in which the sale of an item that has an established market, such as a soft drink or gasoline, is promoted by the use of a game or contest.” Judges have likewise used similar reasoning in court decisions to invalidate sweepstakes using the sale of (essentially worthless) telephone/Internet time cards. And a 2016 decision by the Arizona Court of Appeals held that a sweepstakes run by the local non-profit Elks club constituted gambling where members paid $1 to the charity to obtain a sweepstakes card to run through a kiosk for the chance to win prizes. While members could also mail-in a request for a free (non-donation) play, the Court didn’t care because, while this AMOE may have saved the promotion from being an illegal lottery, the promotion was still gambling in this Court’s opinion because “the members received no goods or services in return for their purchases [donations].”
So, after raising and begging questions, let me provide some helpful tips to consider for businesses and charities that want to help generate charitable donations by running a sweepstakes:
If You’re a Business:
- Give them a hamburger. Consider giving consumers something of value plus a sweepstakes entry in return for making a donation to charity and have a good lawyer consider whether or not your company would be a professional fundraiser or paid solicitor depending on how the promotion is structured.
- Make it a charitable sales promotion. Consider turning the promotion into a commercial co-venture where the consumer buys your company’s product and in return you give them an entry into the sweepstakes and commit to give all or a percentage of the purchase price to charity. Of course, your company will have to comply with CCV laws, but they are much less onerous than professional fundraiser laws.
If You’re a Charity:
- Give them more hamburger. While a tax deduction and the goodwill associated with charitable giving may be enough of a hamburger in return for a donation, a charity could consider selling merchandise or giving donors an additional tangible gift in return for entry into a sweepstakes.
- Make it a raffle. Read up on your state and local raffle laws and structure the promotion accordingly.
And to all, a goodnight.
