Sweepstakes and contests are popular ways for companies to promote their brand and products. With the promise of winning big prizes like cash, cars, or vacations, it’s no wonder that many consumers are eager to enter. But is participating in sweepstakes actually a form of gambling? Let’s take a closer look.
What is a sweepstakes?
A sweepstakes is a contest that awards prizes at random through a drawing. No purchase or payment is required to enter. Sweepstakes are primarily used as a marketing tool to encourage consumer engagement with a brand. Companies collect data from sweepstakes entries to build marketing databases. The prizes motivate more people to enter and provide their information.
There are two main types of sweepstakes:
- Instant win – Entrants immediately find out if they won a prize. Prizes may be awarded at random throughout the sweepstakes period.
- Drawings – Prizes are awarded at the end through a random drawing of all eligible entries. Drawings may be held weekly, monthly, or at the end of the sweepstakes period.
Examples of popular sweepstakes include McDonald’s Monopoly game, Publishers Clearing House, and car giveaways by automakers.
How sweepstakes work
Here is the typical process for entering and winning a sweepstakes:
- A company announces the sweepstakes and prizes. Rules are provided that detail eligibility, entry methods, deadlines, and more.
- Consumers enter the sweepstakes for free by following the official rules. Methods of entry may include an online form, mail-in entry, toll-free number, social media post, etc.
- After the entry period closes, the sponsor randomly selects the winners. Drawings may be conducted manually or by computer. Oversight ensures proper procedures are followed.
- The sponsor notifies the winners according to the official rules. Most sponsors also publish winner lists online.
- Winners complete required paperwork and verify eligibility. Taxes and costs are the responsibility of winners.
- Prizes are awarded to verified winners. Prizes may include cash, trips, cars, electronics, gift cards, and more.
Skill is not involved in winning a sweepstakes. Winners are determined purely by chance through random drawings.
How gambling works
Gambling involves wagering money on games and events with uncertain outcomes. The three essential factors that distinguish gambling from other types of games are:
- Consideration – Gamblers must pay or provide something of value to play.
- Chance – Winning is significantly influenced by random chance.
- Prize – Winnings are tangible items of value like cash or merchandise.
Some examples of gambling include casino games, sports betting, lotteries, raffles, and bingo. Let’s compare two popular forms of gambling:
Lottery
- Players pay for lottery tickets to play.
- Winning numbers are randomly selected in periodic drawings.
- Prizes include large jackpots shared by multiple winners.
Poker
- Players wager casino chips won or purchased.
- Dealt cards and community cards involve luck and chance.
- Players compete to win other players’ chips.
While both involve substantial chance, lotteries provide fixed low odds of winning. Poker offers players some ability to improve odds through skill and strategy.
Key differences between sweepstakes and gambling
There are some clear differences between sweepstakes and gambling:
| Sweepstakes | Gambling |
|---|---|
| No purchase required to enter | Must pay to play (e.g., chips, tickets, fees) |
| Winners chosen at random | Outcomes influenced by chance and/or skill |
| Prizes typically non-cash (merchandise, trips, etc.) | Prizes usually cash winnings |
| Marketers use contests to build brand awareness and gather customer data | Designed as a profit-making activity for operator or charity |
A key distinction is that sweepstakes do not require any payment or purchase to enter. Gambling always involves staking money with the chance of gaining a profit. Even if no purchase is required, promoting gambling activities like lotteries and raffles requires a gaming license or permit.
Are sweepstakes considered gambling by law?
Sweepstakes are not legally classified as a form of gambling. There are a few reasons why sweepstakes do not meet the criteria for gambling under federal and state laws in the United States:
- No purchase required – Sweepstakes must allow free, alternative means of entry (AMOE). Requiring a purchase would make it an illegal lottery.
- Prizes not convertible to cash – Sweepstakes prizes are non-cash merchandise or experiences that have no equivalent cash value.
- Random chance elements – Skill does not impact the random selection of sweepstakes winners. All eligible entries have equal odds.
State gambling laws and lottery statutes specifically cite paying consideration as a requirement. Sweepstakes that adhere to official contest laws by allowing free entries without purchase are exempt from any technical definition of gambling.
However, some states have tried to crack down on “illegal sweepstakes” that attempt to mimic casino-style gambling. These often involve internet cafes that sell internet time and phone cards to access alleged sweepstakes terminals. Players purchase time to reveal whether they won cash prizes. But skill stops and other gambling features are built into software to influence outcomes. These sweepstakes schemes have been deemed illegal gambling operations in many jurisdictions.
No Purchase Necessary laws
“No Purchase Necessary” (NPN) laws require sweepstakes sponsors to provide a free method of entry. These laws originated from a rise in misleading promotions in the 1950s called “sucker lists.” Consumers received mailings announcing they won prizes, but had to purchase magazines subscriptions or other products to claim winnings. NPN laws now mandate that sweepstakes offer an equivalent chance to enter without requiring any purchase or payment.
The Federal Trade Commission enforces NPN regulations that require sponsors to:
- Disclose that No Purchase Necessary to enter or win.
- Provide details on how to enter for free.
- Treat free entries the same as paid entries.
- Not require participants to listen to a sales pitch.
NPN laws allow legitimate sweepstakes to operate legally by offering alternative means of entry. This key requirement prevents sweepstakes from meeting the elements of illegal gambling.
Are sweepstakes considered lotteries?
Lotteries involve paying money for a chance to win a prize. Lotteries are banned in many states without approved government oversight. Sweepstakes do not meet the criteria for illegal lotteries because no purchase is required to enter or win.
In a landmark 1960 case (FCC v. American Broadcasting Co.), the Supreme Court ruled that giveaway contests do not constitute illegal lotteries under federal law. The Court stated that the free, alternate method of entry “negate[s] the existence of consideration” that would classify sweepstakes as unlawful betting.
State lottery laws also follow this precedent. For example, California’s State Lottery Act declares that free contests “do not constitute lotteries” provided there is no requirement for participants to pay or purchase anything to enter. As long as businesses comply with official contest laws, sweepstakes will not be categorized as illegal gambling or betting.
Tax treatment of prizes
One difference between gambling winnings and sweepstakes prizes is the tax treatment. According to the IRS:
- Gambling winnings are fully taxable and must be reported as “Other Income” on tax returns.
- Sweepstakes prizes are generally not taxable income.
The reason for the different tax rules comes down to the element of luck versus skill. Gambling winnings are seen as taxable earnings since skill and active participation can improve chances of winning. Sweepstakes winners are chosen entirely at random rather than through skill. Therefore, sweepstakes prizes are deemed as nontaxable gifts.
However, there are exceptions. Large cash prizes may be subject to taxes. If winning depends on any skill, any portion of the prize deemed earned could get reported as taxable income. Winners should consult a tax professional to assess if taxes apply to the full or partial value of sweepstakes prizes.
Are online sweepstakes legal?
Yes, online sweepstakes are legal as long as they follow the same rules as mail-in sweepstakes. The rise of the internet created new opportunities for digital contests and promotions. But it also opened the door for illegal online gambling operations to disguise themselves as sweepstakes.
To address this issue, the federal government enacted the Unlawful Internet Gambling Enforcement Act (UIGEA) in 2006. This law prohibits online gambling businesses from knowingly accepting payments for illegal wagers like online casinos and sportsbooks. It also exempts lawful online sweepstakes that meet the following safe harbor criteria:
- Offer a free alternate method of entry
- Prizes are non-cash merchandise, not cash or casino chips
- Outcomes cannot be manipulated by operators
- Winners are selected at random under official rules
- No gambling themes like simulated slot machines or roulette wheels
As long as online sweepstakes operate transparently with proper disclosures, they are permitted under federal and state laws. But operators must ensure their contests are legitimate sweepstakes, not disguised gambling activities.
How to tell if a sweepstakes is legal
Here are some tips for consumers to identify legal sweepstakes and avoid illegal scams:
- Check official rules – Legitimate sweepstakes provide full terms and conditions explaining entry requirements, eligibility, odds, prizes, taxes, and winner selection process.
- Research the sponsor – Search the company name online and look up reviews to verify they are a real, lawful business.
- Look for free alternate entry – There should be a way to enter without any purchase, payment or donation. Legitimate sweepstakes accept mail-in entries.
- Winners aren’t required to pay – Taxes are the responsibility of winners. But you should not have to pay processing fees or shipping costs to claim prizes.
- No simulated gambling – Contests should not use gambling terminology or graphics like video poker or roulette that imply outcomes depend on skill.
Consumers can look up sweepstakes laws for additional state-specific guidance. Reputable sweepstakes providers understand all legal requirements and take steps to ensure transparency.
Conclusion
Sweepstakes are a popular marketing tool for brands to generate awareness and collect consumer data. As long as sponsors provide free means of entry and prizes have no cash equivalence, sweepstakes are differentiated from illegal gambling activities. The chance-based nature and lack of payment requirements allow sweepstakes to legally award prizes to randomly selected winners.
Companies need to follow all applicable federal and state laws governing contests and sweepstakes. As long as businesses operate transparently with proper disclosures, sweepstakes provide a legal way to engage customers and promote products. Consumers should review official rules and research sponsors to identify lawful sweepstakes while avoiding illegal gambling scams.
