Companies are gaining better traction and customer loyalty through this engaging activity of sweepstakes
Bloggers and brands rely on sweepstakes, giveaways, or contests to spread brand awareness, rev up sales, collect email lists, and boost social media engagement & followers. But sponsoring a promotion always has the burden of ensuring that it conforms to all local, state, and federal laws specific to the country or regions. There are lots of sweepstakes laws that sponsors must be aware of to save themselves from serious legal repercussions (fines and criminal prosecution) for violations. So if one is thinking of running a sweepstake, giveaway, or contest in the U.S. or Canada for their next marketing campaign, then it’s important to understand federal sweepstakes laws to protect the company from risk.
Sweepstakes rules and regulations differ state-by-state therefore some specific states are void from entering the sweepstakes. The law for the operation of sweepstakes or contests is the same in almost all states. Here one can find all the sweepstakes federal and state laws & regulations that every sponsor must know before running sweepstakes. One will also need to promote giveaways to get maximum potential participants.
What is the difference between sweepstakes, contests, and lotteries?
Sweepstakes, contests, and lottery are different but many sponsors use the term “contest’” for sweepstakes which is incorrect. Let’s learn the difference between them.
Sweepstakes totally depends on luck and chance with no skill required. The winner is picked via random drawing which means each entrant has an equal chance of winning.
Contests need efforts and skill to enter and win. The winner is picked by voting or judges based on the judging criteria. The element of luck is zero in a contest.
Lotteries are just like sweepstakes where winning depends on luck. But the only difference is one has to pay an entry fee to enter and win. Lotteries are illegal in the U.S. so companies can never run a giveaway or contest in this category. Only Lotteries run by the individual state governments are legal.
1. No Purchase Necessary:
No Purchase Necessary is the first statement in the official rules. Asking participants to buy something in order to enter is illegal in the United States. Purchasing makes the promotion become a lottery. However, sponsors run a sweepstake that asks users to purchase only if they offer a free Alternate Method of Entry (AMOE). Adding AMOE lets users enter for free and gives equal odds of winning. Types of AMOE are mail-in, call, text, social media, online entry form, and in-person entry at a store or event. It is mandatory by law to clearly disclose all AMOE in the rules.
2. Official Rules & Legal Disclaimers
It is mandatory to create an official set of full rules which is an agreement between the sponsor and the participants. Once the sweepstakes began, companies cannot make changes in the official rules as it is illegal, and violates consumer protection rules. They are not allowed to extend an entry deadline even if they have received fewer entries. Lots of rules templates are available online but it is advised not to copy and paste them for creating rules. Always review and modify templates as per the state’s laws.
The official rules include the following:
- The statement: “No purchase necessary to enter or win” and “A purchase will not increase an individual’s chances of winning”
- Duration (start and end dates along with time and time zone)
- Eligibility requirements (age, & location)
- Limitations to certain regions, states, groups (loyalty/rewards members, subscribers, account holders or existing customers) or people (athletes, kids, parents, couples, etc.)
- How to enter the sweepstakes with detailed information about AMOE
- Entry limitations by a single person or household
- Odds of winning the prize
- Prize information (including number, description, & value of prizes)
- Prize fulfilment/delivery details
- Criteria for judging/voting method
- Liability limitations
- How the winner(s) will be selected and notified with the date & method
- Restrictions on receiving the prize
- Void jurisdictions
- Sponsors, affiliates, and promoters of the giveaway.
- Physical address
- Acknowledgment that the promotion isn’t sponsored, endorsed or administered by, or associated with any social media platform used throughout the sweepstakes, or contest
- Privacy and publicity regarding the usage of participants and winner’s information.
3. Taxes and 1099s
As per the IRS (Internal Revenue Service), sweepstakes prizes should be reported as ordinary income, no matter what their value is. So winners are liable to pay taxes on all of the prizes they win. This means the Sponsor must submit an IRS Form 1099 to the IRS for prizes valued above $600 and even mail a copy to the winner by January 31st of the following year in which the winner received a prize. If this rule is not followed by sponsors, the IRS may impose penalties. Once a winner receives a copy of the form it’s his/her responsibility to file and pay taxes. Sponsors are also required to retain records of the sweepstakes prize winner(s) for up to 4 years.
5. Tax Withholding
If the sweepstakes prize is above $5,000 cash, then the sponsor must withhold 25% of the value for federal taxes. For non-cash prizes like car or trip, the winner must pay the sponsor 25% of the prize FMV in cash before you receive the prize. The withholding of state taxes related to prizes is optional.
6. Affidavits and Releases
Sponsors must verify the winners before awarding the prizes. An affidavit of eligibility declares that the sweepstakes prize winner is eligible to win a prize under the official rules. Winners must sign and return an affidavit and liability/publicity release to claim the prize.
7. Skill Question
Canadian Competition Act categorizes sweepstakes as a form of gambling so the winner must be chosen based on skill rather than luck. Thus, sponsors are required to add one step when it comes to sweepstakes winner. Sponsors are required to ask the winner a skill-testing question, easy math testing question, or trivia question to win a prize. The entrant must answer the question correctly within 5 minutes without any assistance to win.
Sweepstakes Laws State-by-State Exceptions
All the states have similar sweepstakes laws but a handful of states have additional laws.
The contest requires a purchase or payment to enter must be registered with the Arizona Attorney General with a sworn statement that the product price was not increased during the contest period to boost sales. And once all the prizes have been awarded, supply a winner list to the state within 10 days.
Colorado, Maryland, Nebraska, North Dakota, Vermont:
The contest requires a purchase or payment to enter is not allowed even if the winners are selected on the basis of skill or criteria.
Florida, New York:
Any sweepstakes with the total value of prizes over $5,000 must be bonded and registered 7 days before the sweepstakes begin. And once the sweepstake is over, file a winners list and send it to anybody who asks for it. Therefore most sponsors offer sweepstakes with an ARV of $4,999.
In Massachusetts, sweepstakes involving tobacco are illegal.
Michigan and Virginia:
Sweepstakes involving tobacco well as sweepstakes required entrants to visit a store are illegal in Michigan.
Sweepstakes that require entrants to visit a store must offer an AMOE
Any sweepstakes with the total value of prizes over $500 must be registered with the state before it begins.
Sweepstakes that ask winners to submit a public release are illegal in Tennessee
Sweepstakes with the total value of prizes more than $50,000 offering participants an entry for making a purchase is prohibited.
One may have often seen that most of the sweepstakes are void in Quebec although 25% of Canada’s population is in Quebec. It’s because, sponsors have to follow a strict set of laws by Quebec’s Régie des alcools, des cours et des jeux (RACJ). Sponsors are required to offer rules in French & English, pay a duty to the RACJ, register sweepstakes rules with the Quebec government, and more.
Note: This post is only guidance not a substitute for legal advice. So, make sure to obtain legal guidance from an experienced attorney to ensure 100% compliance with all applicable local, state, and federal laws to keep things legal.