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Many California nonprofit corporations receive a significant amount of income from various types of gaming, such as bingo, poker tournaments, and raffles. Both state and federal laws govern these activities, prohibit certain forms of gaming and mandate registration and reporting. Each state has different rules on gaming. This brief overview looks at California laws governing these activities as well as touching on federal tax implications. It does not discuss auctions which are not considered gaming under California law.
BINGO
Under section 326.5 of the California Penal Code, certain California nonprofits are eligible to conduct bingo games if permitted under a local city and/or county ordinance. The authorizing ordinance must be enacted under section 19 of Articles IV of the California Constitution. Such ordinances generally can be found in the local municipal code, the content of which may be available online or through local government officials.
The bingo game must be conducted consistent with the California Penal Code and the authorizing ordinance. Under the Penal Code, the following requirements apply:
What organizations are eligible: Organizations eligible to conduct bingo include those exempt from taxation under California’s Revenue and Taxation Code Sections 23701a, b, d, e, f,g, k, l, and w and mobile home park associations, senior citizens organizations, and charitable organizations affiliated with a school district.
Registration Requirements: Local cities and/or counties usually require registration or application for a permit prior to conduct of the game. An example of an authorizing ordinance from my hometown of Alameda is here.
Who can participate: Minors under 18 years old may not participate in the bingo game and the game must be open to the public. Participants must be physically present at the time and place where the bingo game is conducted.
Who can operate the game: The game must be operated and staffed only by members of the nonprofit organizing it. Neither those members nor any other person may receive a profit, wage, or salary from the game with the exception of security personnel.
Where the game can take place: The nonprofit must conduct the game on property either owned or leased by it, or the use of which is donated to it, and that property must be used by the nonprofit as an office or for the performance of its tax exempt purposes.
What can be included as prizes: The total value of prizes cannot exceed five hundred dollars in cash or kind for each game. Local laws may reduce this amount.
How proceeds from the game can be used: For 501(c)(3) charities, all profits from the game must be kept in a segregated account and used only for charitable purposes. For other eligible nonprofit organizations, all proceeds of the game must be used for charitable purposes with minor exceptions as outlined in California law.
Local bingo ordinances often have further detailed requirements, including length and number of permissible events, and require registration and/or a permit prior to conducting the game.
POKER
Under Article 17 of the California Business and Professions Code, qualified California nonprofit organizations may engage in “charity poker nights” with games such as poker and Pai Gow subject to the following restrictions:
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What organizations are eligible: Organizations must be qualified to conduct business in California for at least three years prior to holding the poker night and must be exempt from taxation under one of the following sections of the Revenue and Taxation Code: 23701a, b, d, e, f, g, k, l or w.
Registration requirements: Eligible organizations must register annually with the Bureau of Gambling Control. Registration forms are here and must be accompanied by a $100 non-refundable registration fee. In addition, local ordinances may impose additional registration and other requirements.
How often/how long: Each nonprofit or chapter can hold a maximum of one poker fundraiser per calendar year. Each fundraiser can last a maximum of five consecutive hours and no more.
Who can participate: Participants must be 21 years or older.
What can be included as prizes: Cash prizes are prohibited. All prizes must be donated. Individual prizes cannot exceed a cash value of five hundred dollars and the total cash value of all prizes cannot exceed five thousand dollars per event.
How proceeds from the game can be used: At least ninety percent of the gross revenue from the fundraiser must go directly to a nonprofit organization; no more than ten percent can be paid as compensation to anyone conducting the fundraiser (exclusive of any facility rental costs).
What records must be kept: The nonprofit must retain records of the fundraiser, including (1) itemized list of gross receipts, (2) itemized list of recipients of the fundraiser’s net profits, (3) number of persons participating, (4) itemized list of direct costs incurred, (5) list of all prizes awarded and (6) date, hours, and location of each fundraiser.
RAFFLES
California Penal Code section 320.5 prohibits raffles unless conducted by an eligible organization in compliance with applicable laws and regulations.
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What is a raffle: In California, a raffle is a scheme (1) for the distribution of prizes, (2) by chance, (3) among persons who have paid money for paper tickets, and (4) the paper tickets provide the opportunity to win these prizes.
A raffle is exempt from registration with the Attorney General’s Office if all of the following are true: (1) It involves a general and indiscriminate distribution of the tickets; (2) tickets are offered on the same terms and conditions as tickets for which a donation is given; and (3) the scheme does not require any of the participants to pay for a chance to win.
What entities are eligible: Organizations must be nonprofits qualified to conduct business in California for at least one year prior to conducting the raffle and exempt from taxation under Revenue and Taxation Code Section 23701a, b, d, e, f, g, k, l, t or w.
Registration Requirements: Eligible organizations must register annually with the Registry of Charitable Trusts, California Department of Justice. Registration forms are here and must be accompanied by a $20 registration fee.
How the raffle must be conducted: The paper raffle tickets must be sold with a detachable stub or coupon, and have a unique matching identifier on both the ticket and the stub. The draw must determine the winner of the prize from among the detached stubs. It must be conducted under supervision of a natural person 18 years or older. It cannot be conducted by gaming machine.
How proceeds from the raffle can be used: At least ninety percent of the gross receipts from the sale of raffle tickets must be used to support a beneficial or charitable purpose or another nonprofit organization that performs beneficial or charitable purposes.
Restrictions on online raffles: The raffle may not be operated over the Internet and raffle tickets cannot be sold, traded, or redeemed over the Internet. However, the organization can advertise the raffle on the Internet if the information includes: (1) lists, descriptions, photographs or videos of raffle prizes, (2) lists of the prize winners, (3) rules of the raffle, (4) Frequently Asked Questions, (5) raffle entry forms (that can be manually downloaded and sent or submitted to the organization NOT through the Internet), and (6) raffle contact information.
Raffle reporting: Nonprofits must prepare and submit a Nonprofit Raffle Report (located here) after all raffle events for the registration year have occurred. The nonprofit must also retain records of the following: date and location of raffle, total funds received from each raffle, total expenses for conducting each raffle, charitable or beneficial purpose for which the raffle proceeds were used or the amount and organization to which proceeds were directed.
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FEDERAL TAX
Even if a nonprofit’s charitable gaming is in compliance and with California and local laws, it may still need to consider the effect on its tax-exempt status. In particular, it should review its gaming practices under:
Qualification for Tax Exemption: Gaming is a business and recreational activity; it is not charitable in nature nor does it promote social welfare. For charities, social welfare organizations, and labor, agricultural or business leagues, gaming should be limited to an insubstantial part of the organization’s activities. For other relevant organizations, including social clubs, fraternal organizations and veterans’ organizations, gaming activities must be evaluated within the context of the applicable tax rules to avoid jeopardization of exempt status.
Unrelated Business Income Tax: Exempt organizations pay tax on unrelated business income (UBI). Activities may generate UBI if they are a trade or business (such as gaming), regularly carried on (for example, every week), and not substantially related to the organization’s exempt purpose. There are a number of exceptions to UBI such as for qualified bingo games and activities conducted with substantially all volunteer labor that may apply in the context of charitable gaming and should be reviewed.
In addition there may be other tax and reporting requirements that apply. The IRS publication 3079 on Charitable Gaming provides a good overview for use by exempt organizations and their advisors on the tax laws governing gaming activities.