Event season is rapidly approaching, and committee members are busy preparing and planning raffles, selling tickets, and collecting items for silent and live auctions. Unfortunately, many nonprofits overlook common legal pitfalls. Spokes wants to help you avoid this costly mistake. Read this article to learn about registering for raffles, incorporating disclosure statements, and being prepared to pay sales tax.
RAFFLES
Did you register your last nonprofit raffle with the State Attorney Generals’ office? If not, then you broke the law…and you’re not alone. Many nonprofits don’t realize that unregistered raffles can result in hefty fines. In 2017, CalNonprofits conducted a survey and found that 38% of the nonprofit respondents said they were “unfamiliar” with raffle requirements. Only 51% who held raffles filed the required annual reporting form.
The good news is that it’s easy to conduct a raffle legally. Before your next fundraiser, follow this raffle checklist to:
• Submit application CT-NRP-1, your IRS 501c3 determination letter, and a $20 check at least 60 days prior to the event.
• File the Nonprofit Raffle Report no later than October 1 the following registration year.
• Report earnings to the IRS.
• Invest 90% of all funds raised into mission-related projects.
Following raffle compliance guidelines can feel like a lot of extra work, and there is a movement to simplify the requirements. If you want to help, sign CalNonprofits’ petition to support Assembly Bill 2347 to decriminalize small raffles. This bill seeks to:
• Eliminate post-raffle reports for nonprofits that hold small raffles.
• Allow nonprofits to hold 50/50 cash raffles if a single raffle raises small amounts of money and all raffle activity is below a similarly small dollar threshold. (Currently, all 50/50 cash raffles are illegal except for charities affiliated with major league sports teams.)
DISCLOSURE STATEMENT
Every time a donor purchases a ticket for an event, the nonprofit is required to let them know how much of their payment is tax-deductible. For instance, imagine a nonprofit is charging $100 for a gala ticket.
$100.00 = Ticket
$45.00 = Food and entertainment costs
$55.00 = Tax-deductible amount
It is mandatory to disclose the tax-deductible amount. On fundraising solicitations and tickets, add the statement: “The tax-deductible portion of each ticket is $55.00 and considered a donation in support of [organization], EIN # ___-______”
SALES TAX
There is a common belief that “tax-exempt” means that nonprofits don’t pay sales tax. In reality, every time a nonprofit sells or purchases an item – something tangible that you can touch – it must charge or pay sales tax.
Think of it this way: when a donor “buys” a tangible item, the nonprofit is “selling” it to the donor. Therefore, the item transfer qualifies as a sale and is taxable. After the sale, the nonprofit must pay sales tax to the State Board of Equalization (BOE). The nonprofit may charge the donor sales tax or it may deduct the appropriate sales tax amount from the donors’ payment and pass it on to the BOE. Please note that there is extra tax consideration for selling food; for more clarification, read this article: When does a nonprofit organization operating in California need to pay sales tax? or contact the BOE.
We know all these rules and regulations are intimidating. We’re here to help! Spokes has resources and tips for staying in compliance with the law. We will gladly take your calls and emails if you have questions about registering for raffles, incorporating disclosure statements, being prepared to pay sales tax, or other regulations: call (805) 547-2244 or email [email protected] for support.
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