Mark Pestronk
Q: My agency is organizing a "cruise night" at a local hotel. In a ballroom, the participating cruise lines will each have a booth. We plan to give away a cruise to one winner by drawing a business card from a hat. Unfortunately, our agency will have to pay for the cruise. Can we help subsidize the cost by charging $10 for each entry? This might be attractive if we let people buy as many tickets as they want, because the more they buy, the greater the chance of winning.
A: What you described would be an illegal lottery under the law of all 50 states and the federal government. I strongly caution against charging for tickets or anything else in relation to the contest.
In the U.S., only government agencies and some nonprofits are permitted to conduct lotteries. Even then, they are subject to strict rules and not all states permit them.
To avoid having your contest tagged as an illegal lottery, you cannot require a purchase of any kind as a condition of winning. Even if you didn't require a purchase, you could not insist that participants do anything that benefits you financially, like promising to use your agency after the cruise night ends.
Now you know why all sweepstakes and giveaways say "no purchase necessary" in their rules, as counterproductive as that sounds to a businessperson. For example, you might have wondered why cereal companies put the contest on the side panel of their boxes and then say "no purchase necessary."
You cannot even limit participation to existing clients who have done business with you, as that is just like requiring a purchase as an entry fee into the contest. Another related prohibition is charging the winner any fee for something like shipping and handling. That charge is also like requiring an entry fee in order to win.
Let's say that anyone who comes to the cruise night can enter the contest and that there are no fees associated with it in any way. In that case, you have overcome the lottery issue, but many states also have other contest rules.
For example, your state may require that participants be at least 18 years old, not be related to you and must reside in a location that does not prohibit contests altogether. The last requirement is why contest rules always state, "Void where prohibited by law."
State laws generally require you to have written rules for contests. You must make the rules available to anyone who asks, and you cannot change the rules once the contest begins.
For a cruise prize, the rules need to state all restrictions on use, such as blackout dates, destinations and double-occupancy limits. The same would be true for all-inclusives and airline tickets.
In a few states including New York and Florida, contest rules must be prefiled with the state, and you may have to post a bond if the prize is big enough. For example, in New York, you must file the rules if the prize value is over $5,000.
One more thing: If the prize is worth $600 or more, you have to file a 1099 with the IRS, as the prize is taxable income.
By the way, it makes no difference whether you have to pay for the cruise or not. Even if the cruise line gave you the cruise to give away, the rules here still apply.
At this point, you are probably wondering how cruise lines and other suppliers can legally give away their products at trade shows or presentations by drawing a business card from a bowl. The answer is that there are no exemptions for them, so they must follow all the same rules as you. If they don't, they are not in compliance with the law.