Our charity needs to know if we are able to advertise/sell raffle tickets for a fundraising event online to people in several particular states and if there are states where we cannot legally sell such tickets. Also, will we need to register and apply for a license in the states in which we will be selling tickets, even if we are not physically located there?
You have hit one of the “third rails” of fundraising. Lotteries are something that charities run all the time, but often don’t comply with the relevant laws.
A lottery or a raffle requires three elements: It must (1) offer a prize (2) to someone who provides consideration, usually cash, for (3) an opportunity to win the prize determined by lot or chance, as opposed to skill. Most states regulate raffles and lotteries in some way. Some states have both state and local regulation of lotteries.
Whether you can sell your tickets online will be a matter of the law of every state in which you are promoting them. Whether you need a license to sell them may be up to the local municipality in which you are trying to sell them. You need to check the law of every state in which you want to sell. You will probably find a lot of obstacles.
You should also know that the U.S. Postal Service has strict rules against mailing promotions or tickets for lotteries in most situations. And the IRS refuses to grant a charitable contribution deduction for the payment on the theory that what the purchaser pays is the value of the opportunity to win the prize.
We once explained to a client that she needed to get a license from her local municipality to raffle off a new car at her annual fundraiser. She said she was aware of the rule but didn’t worry about it because the assistant district attorney in charge of enforcement was her best ticket seller.
Even without that connection, a whole lot of charities take the risk because there isn’t a great deal of enforcement of the rules. The problem is that if someone wants to get you, the proof is easy to obtain and there is no defense.