You’ve probably seen this before: your favorite mommy blogger is giving away the hot new car seat using Rafflecopter, and the comments are spattered with Canadians grousing about how they can’t ever enter these giveaways. Or this: your favorite big box store is holding a contest offering an all-expenses paid trip to the beach if you pin a photo of your family at the beach on a special Pinterest board, but New York residents are excluded from entering. Online giveaways – legally known as sweepstakes – are more popular than ever, but they are still subject to federal and state laws.
No matter what they’re called – contests, giveaways, or sweepstakes – these online promotions actually have legal names and descriptions.
Types of Giveaways
And it’s important to know what your particular giveaway is called legally, so you can be sure to keep it compliant with the law.
- A sweepstakes is any giveaway with free entry for chance to win, also known as “no purchase required.” In the online world, these entries often look like “likes” or “shares” of a post or commenting on a post.
- A contest is a competition where the winner is judged based on a talent or skill, rather than a random drawing. Online that may be the best photograph or video submitted.
- A lottery is a game where you give some kind of consideration in return for a chance to win. Obviously, in a state lottery you buy a ticket and hope that your ticket is a winner. The purchase price of your lottery ticket is the consideration necessary to make the game a lottery. Lotteries are highly regulated and not something you typically find online.
Some things to consider…
Unfortunately, the law has not quite kept up with the times in this realm of the Internet. Most of the laws governing online giveaways are based on the old-fashioned, snail-mail types that you might have entered when you were a kid. (For you children of the 80s, remember mailing off a postcard to win some BK Knights or a Harlem Globetrotters basketball?) It’s confusing to apply old laws to new technology, but in this transition it is still important to comply with the laws as they’re written. If you are planning on offering an online sweepstakes or lottery, you will need to consider the following components of your giveaway. (Please note that this is just a general overview of the laws governing online giveaways, and not comprehensive legal advice.)
Who will you permit to enter?
For example, Canada only permits contests. This is one reason that online sweepstakes are not open to Canadians. Furthermore, Quebec has specific language requirements for contests, making it very complicated for an American company or blogger to comply with the various rules in Canada.
You also must confirm that you are not running afoul of any state-specific laws. Some states limit the types of things that can be won in sweepstakes, so residents of those states are excluded from entering. Some states, like New York and Florida, require registration of the sweepstakes if the amount of the prize is over $5,000, and the sponsor may decide to exclude those states too. If you are opening your giveaway to all residents of the U.S., then it’s important to know whether your particular prize is going to violate the rules of any states.
You may also want to consider if your prize necessitates age limits on who can enter your giveaway. For example, if your prize consists of alcohol or hotel stays, you will need to restrict your entrants to the appropriate age limits. If, by chance, your giveaway could attract children 13 and younger, you must follow specific laws protecting children online. This is generally why the online giveaways we see are limited to 18 or 21 and older.
What’s the total value of your prize?
The IRS requires you to report your sweepstakes if the prize has a value of $600 or more. The sponsor of the sweepstakes must submit a Form 1099 to report “prizes and awards that are not for services, such as winnings on TV or radio shows” above $600. It is a good idea to collect the winner’s name and social security number for the tax form before sending the prize. The sponsor’s form 1099 is due to the winner by the January 31st after the year the prize was awarded, and to the IRS the following February (for paper filing) or March (for electronic filing). And all winners of prizes, no matter the value, must report their winnings to the IRS as “other income.”
Do you have clear, comprehensive rules?
Nobody wants their giveaway to go awry, but with potential glitches in technology, it’s important to have clear rules about how the giveaway will be conducted and what you will do if anything goes wrong or interferes with it. The rules should also make clear the exact ways for people to enter, and any exclusions you have on entry. If you are awarding a big prize, it’s helpful to include information about the required tax reporting in your rules as well. If in doubt, don’t leave it out! You want your entrants to see that you are serious about conducting a fair giveaway, and in turn, you want to handle any problems according to the rules you’ve set out. This is just good business.
One final thought…
As we discussed above, lotteries are highly regulated because they require the entrant to give consideration in exchange for a chance to win. Consideration is a legal term that means something of value. So typically, the entry fee (e.g., buying a lottery ticket or paying money) would be the consideration. However, it’s unclear if relatively burdensome entry requirements could elevate a sweepstakes into an illegal lottery. For example, a sweepstakes normally requires a comment or share or like of a post to enter.
What if it required entrants to comment on and like five different pages, or to comment with a picture of the entrant and a sponsor’s product? Would these “extra effort” entries be considered “something of value,” because they are requiring the entrant to go above and beyond a simple “no purchase necessary” entry method? Again, it’s not clear yet because the laws have not caught up to the plethora of social media giveaways, but it is something to consider when creating the entry requirements for your sweepstakes.
Keep these safeguards in mind when creating your online giveaway so you can be compliant with the applicable laws. And remember, it is sometimes necessary to get legal advice from a lawyer knowledgeable in online marketing and giveaways.