Business Law Articles
By: Casey Gocel, Esq.
Dan Richards, Legal Intern
Khizar Sheikh, Esq.
Mandelbaum Salsburg P.C.
Roseland, New Jersey
Hosting a giveaway, such as a sweepstakes or prize contest, is a great way to promote your brand and raise awareness for your business. Giveaways can be promoted at a business location, on a company website or on social media sites such as Facebook, Instagram and Twitter. If you plan to host a giveaway it is important to first familiarize yourself with the legal requirements to avoid unnecessary sanctions and penalties.
LOTTERY, SWEEPSTAKES OR CONTEST?
First, it is important to understand the distinction between sweepstakes, contests and lotteries. Business entities are only permitted to host sweepstakes and contests. Lotteries, on the other hand, may only be run by a government entity. A lottery must include: something of value that a participant provides for entry (i.e., consideration); a prize; and some degree of chance. In order to avoid being classified as a lottery, a business entity (known as the “Sponsor”) must remove one of these three elements from its promotion.
LOTTERY = CONSIDERATION + PRIZE + CHANCE
Sweepstakes lack the element of consideration, so they consist solely of a prize and chance. Consideration in the form of a purchase requirement is easy to identify. However, some states take the position that consideration exists where the entrant is required to exert substantial time or effort to participate in the giveaway, such as filling out a lengthy marketing questionnaire. Therefore, participants must be able to enter the sweepstakes without exerting significant effort or giving anything of value.
SWEEPSTAKES = PRIZE + CHANCE
Contests, on the other hand, replace the element of chance with skill, so contests involve the elements of consideration (in the form of ability or effort) and a prize.
CONTESTS = CONSIDERATION + PRIZE
Once you have determined whether you wish to host a sweepstakes (game of chance) or a contest (game of skill), the next step is to adopt “Official Rules”, which are compliant with both federal and state laws.
FEDERAL LAW REQUIREMENTS
The federal laws governing giveaways are somewhat broad in scope. The Deceptive Mail Prevention and Enforcement Act (the “Deceptive Mail Act”), applies to sweepstakes that are promoted through direct mail. The Deceptive Mail Act was primarily developed to prevent scams and prohibits Sponsors from engaging in certain deceptive behaviors, including: claiming the recipient is “already a winner”, sending voided checks that do not clearly state that they have no cash value, and requiring that the recipient purchase something to enter.
The Federal Trade Commission (FTC) also protects against deceptive trade practices. Under the FTC regulations, a sweepstakes must have written “Official Rules” which include the Sponsor’s contact information, a description and value of the prize(s), eligibility requirements and the odds of winning. While it is important to recognize that the FTC regulations do apply to giveaways, the state laws governing these promotions are far more encompassing.
STATE LAW REQUIREMENTS
The biggest hurdle when hosting a giveaway is complying with the laws of each state in which you plan to promote the sweepstakes or contest. If the giveaway is only being offered at a business location, entry can be limited to individuals within the particular state where the business is located. In this case, you will only need to comply with one state’s law.
Alternatively, if you wish to promote your giveaway online, you must decide if entry will be limited to residents of a select number of states or if entry will be open to all U.S. residents. Sponsors are required to comply with the state law of each state in which residents are permitted to enter the giveaway. In other words, if you wish to allow entries from all 50 states, you must comply with 50 different state laws.
Each state law regulates the kind of information that must be included in the Official Rules. Generally speaking, the Official Rules must always include the following:
- The odds of winning
- Eligibility requirements (including age and residency restrictions)
- Name and address of the Sponsor
- Entry instructions and entry period
- Prize description and total value of all prizes
- “VOID WHERE PROHIBITED BY LAW”
- “NO PURCHASE NECESSARY TO ENTER OR WIN”
In addition to drafting legally compliant Official Rules, it is also important to comply with state-specific requirements.
Bonding and Registration
Some states require the prize value be bonded in the event that the prize value is above a defined amount. For example, both Florida and New York require that the Sponsor post a bond where the prize value is greater than $5,000. New York law further requires that this bond be posted at least 30 days prior to commencement of the giveaway. Rhode Island does not have a bonding requirement, but all giveaways with a total prize value in excess of $500 must be registered with the state.
State advertising law governs the advertisement of giveaways. For example, some states require that a full list of all rules be included in all advertising materials. Other states only require disclosure of the material rules in advertising materials. Furthermore, in cases where the promoter is advertising in a retail location, many states require that the Sponsor place a poster with the Official Rules inside the retail location.
Record Maintenance and Other State Specific Restrictions
State law varies on how long sweepstakes and contest materials must be held by the Sponsor following the end of the promotion. Some states also require that the winners list be submitted to the state.
When assessing the applicability of state law, it is also important to consider the following nuances: variations in the age of majority; restrictions on businesses that engage in the sale of tobacco, alcohol, firearms, time-shares, gas and financial services; and timing requirements for the delivery of prizes.
The stakes for violating state and federal giveaway laws are high. Penalties for violation of these laws vary widely but can include exposure to civil liability, civil fines and criminal penalties. Sponsors may also be subject to an injunction prohibiting the Sponsor from conducting further giveaways in each state in which a violation occurred. Because of these severe penalties, business owners must be diligent in complying with applicable law when promoting a sweepstakes or contest.
Complying with federal and state law is vital when it comes to hosting a giveaway, but there are other consideration that need to be addressed depending on the where you intend to host your giveaway and what kind of information you plan to collect from entrants.
The Internal Revenue Code mandates that the value of the prize be included in the winner’s gross income. If the value of the prize is $600 or more, the Sponsor must file a Form 1099 with the IRS (with a copy to the winner) reporting the value of the prize. Where the prize is cash or its equivalent, the value to be reported is, obviously, the face value. If the prize is not paid in money, then the "fair market value" of the prize must be reported.
Unfortunately, there is no IRS regulation defining "fair market value" and revenue rulings and Tax Court decisions set no uniform method for determining fair market value. Objective factors are the primary ones looked at, but subjective factors also can play a part in determining the fair market value of a prize.
Two common sweepstakes prizes which often lead to disputes or dissatisfaction with the winner regarding reported fair market value are automobiles and trips. As to automobiles, the immediate tendency is to report the manufacturer’s suggested retail price (MSRP) as the value, since that usually is the "approximate retail value" assigned to the prize in the giveaway’s Official Rules. However, automobiles are rarely sold for the MSRP. Accordingly, the lower price at which the Sponsor purchased the vehicle may be a more acceptable fair market value.
When it comes to travel expenses, there are many different ways to ascertain their value, such as the advertised cost of airfare or standard hotel rates or cruise rates. Often, these are the values used in the Official Rules and in advertising materials. As with automobiles, however, trips are often purchased at a discount, especially if they are being purchased in bulk. Thus, Sponsors may also need to consider their direct costs for the different components of the trip in determining the fair market value of the trip for purposes of the Form 1099.
Finally, many Sponsors wish to assist the winner in paying any taxes due on the receipt of the prize, by offering the winner additional cash. Please keep in mind that any money used by a Sponsor to defray a winner’s taxes on his/her prize is additional taxable income to the winner.
Social Media Rules
If you plan to host a giveaway on a social media platform, such as Facebook, Instagram or Twitter, you should first consult with the site’s terms and conditions to determine any rules applicable to sweepstakes and contests. For example, Facebook has certain disclaimer language that must be included in the Official Rules and has banned the practice of “like-gating” (i.e., when you require a user to like a page to enter a contest).
Data and Privacy Law Issues
If you wish to run an international sweepstakes or contest, you will need to comply with the local laws of each jurisdiction in which the giveaway is being promoted. Sweepstakes and contest laws vary from country to country. You will also need to consider local privacy and data transfer laws since data will be collected internationally and transferred back to, and used in, the United States. The kinds of data you are collecting, the countries from which you are transferring, the location of the data’s servers, and the intended use of that data all become important considerations.
If you are considering hosting a giveaway, please consult a sweepstakes law expert, so that you can enjoy the fruits of your marketing efforts without incurring unnecessary sanctions and penalties.
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