Portions of the following information are drawn from previous postings on the NPTalk discussion list. The following material is provided merely for background and reference information, and should not be considered or substituted for legal advice. Please consult with your organization's legal counsel for more information. Why would any nonprofit be confused about whether or not it can conduct online gaming to help raise funds, attract members, or for other purposes? Consider, for a moment, an exchange that took place on the ever-informative Cyber-Accountability discussion list during February 2001. A young entrepreneur was interested in establishing a nonprofit entity that would host online raffles. Individuals would be encouraged to select a product that would be designated a prize for a raffle, and the charity that would receive the proceeds from that raffle. Potential participants would then purchase raffle tickets, the expected total generated would be between 5-10 times the value of the original donor's purchase, with about 10% of the revenue going to the nonprofit hosting entity. Sound like a neat way to raise funds for deserving charities while raising the visibility of good works, no? Taking a Chance on Semantics Well, yes, except for one small detail: Raffle tickets are not considered a charitable contribution exempt from taxation. Why? Because raffles are basically considered a type of lottery. This means that a product or service must be purchased as a condition for entry and participation. As such, raffle tickets are treated as proof gaming more than a contribution. What's difference? As Jonathan Ezor points out in a GigaLaw article on legal online prize promotions and sweepstakes, there is a world of nuance that goes with online gaming activity. The type of scrutiny applied at the state and local level rests with how winners are chosen and prizes are distributed, as well as the requirements for participation, the amount of information available for potential participants, and the manner in which it is distributed. This means, for example, that in selecting a target audience, groups can not be excluded on the grounds of socioeconomic concerns (equal protection laws say so). Also certain basic principles (like marketing to or requiring information from children, ensuring the privacy and security of transaction information) must be followed when distributing information on online gaming. While lotteries usually involve a purchase of something to participate in a random-chance event, sweepstakes require no payment of exertion of skill for a random-chance activity. Contests, however, involve some skill or performance of task. If the amount of time or skill exerted in a contest, however, is found to be significant, it can be considered in some instances, as a form of payment required for participation-- much the same as a lottery. Trickier are those instances in which a promotion involves judges, and/or selection of a winner from a narrow pool of all entries. Basically lotteries raise the highest level of scrutiny among the three types of gaming in general, especially since private lotteries are prohibited, but state-sponsored lotteries are legal. This is why most promotions are very careful about calling themselves contests or sweepstakes, with very detailed language and procedures covering everything from alternate means of participation (via phone or mail participation), the amount of time in which participation can take place, and the procedure for selecting a winner and distributing prizes. Individual state and local government regulate raffles based on the locations where tickets can be purchased. As such, any business or nonprofit seeking to enter into such a activity is strongly encouraged by no less a body than the National Association of State Charity Officials to register in each of the 36 states requiring registration of entities that seek to solicit contributions from the public. Since this type of solicitation involves an element of gaming or gambling, this might also require compliance with a state's charity gaming and/or gambling commissions. Such a body would probably, at a minimum, impose a requirement that a nonprofit entity soliciting charitable contributions through gaming in general be in existence for a certain length of time before such activity could even take place. There would also probably need to be diligence in complying with the laws and regulations of the state in which such activity is operated, enforced by a state's attorney general. The proposed nonprofit entity wanted to use the Internet to conduct charitable gaming activity, providing a potentially international base of participants. This raises, however, another set of complications. Because of the reach and scope of the Internet, activity that might be logistically complex offline, such as gambling, can occur without geographic boundaries. Just because something can be done, however, does not mean it is permissible. Resources Cyber-Accountability discussion list http://www.bway.net/~hbograd/cyb-acc.html Jonathan Ezor June 2000 GigaLaw article on Online Gaming http://www.gigalaw.com/articles/ezor-2000-06-p1.html National Association of State Charity Officials http://www.nasconet.org A Short Twisted History of Gambling in the U.S. The U.S. is a little peculiar in that we have turned with a knowing wink and smile our attention away from illegal gambling, unless a really bad scandal pops up-- at which point regulation becomes a priority. The following overview is drawn in large part from Roger Dunstan's research compiled in an excellent 1997 report entitled "Gambling in California" Think back to the days of the colonists from England. You were either Puritan in your beliefs, or English in your gaming skills. The Puritans tended to frown (and scowl, and generally ban) any gaming in their colonies-- which just happened to include large chunks of New England and Pennsylvania. This meant not only bans on gaming tools (even in private houses), but partying in general (they eventually eased up on the restriction, as long as you could prove it was for fun, and not for profit or profession). The English basically thought, "gambling? Heck, it's your money,"-- and since there were a relative few who actually had money, it was associated with gentlemanly pursuits-- except to the backers of colonial expeditions and the Crown. But consider that the first racetrack (and first horserace betting system) in America was built on Long Island-- in 1665! If you had this much time to lose your money, what actual settling were the settlers up to? Since most of the settlements were money losers, anyway, someone finally got the idea to hold public lotteries to raise funds for supplies and travel and community goods and services. Although England considered this approach a competitive revenue source, the money not only helped early colonies to survive, they also helped fund the development of schools (especially tiny places called Princeton, Harvard, Columbia, Dartmouth, Yale), churches and libraries. Heck, they even had instant winners cash prizes back then, who knew? The colonies raised a stink, because England was raising all this money, yet holding the strings on colonial rule, so in order to even fund the American Revolution, we needed to hold a $10 million lottery (which, unfortunately, no one bought into). Funny thing about those early lotteries-- either no one bought tickets, or the organizers usually bolted town before the proceeds could be counted (like an infamous 1823 lottery to help improve Washington, DC). While all of this was going on, casinos grew in popularity, especially as more people came to live in the colonies. As more people took up farming and mercantile enterprises, English settlers met Spanish and French populations, which had more open minds (and purse strings) towards gaming. This includes riverboat gambling (which oddly enough, only seems to have occurred informally for about 20 years before the War between the States). The South, however, not only happened to boast a number of gambling palaces and capitals, but also had big concerns about professional gamblers coming to town and diverting much desired revenue. Not only were card sharks (or sharps, to be grammatically correct) and their ilk run out of town, some of them found themselves on the wrong end of makeshift nooses. As more people moved west, gambling followed. It's not hard to see why. Gambling was considered a social disease, and grassroots opposition managed to combine with other grassroots advocacy interests representing the poor, literacy, women's rights, children's rights, temperance, prisoner's rights, and even abolition. The tides of society got moral, and gamblers had no place in proper society. Lotteries were especially a prickly business, because they were associated with privilege, especially since they were operated by monopolies chartered by local (and even state) governments. During the same time period, riverboat gambling enjoyed popularity (only if your state had an actual river), most states in existence had banned public lotteries. Yet when public lotteries were banned, tickets began to circulate for lotteries that were legal in other states-- as well as tickets for illegal lotteries. The War Between the States, with its river fighting, helped to knock out the riverboat gaming trade on its own. Yet immediately after the war, the South needed the revenue public lotteries afforded. The most notably was Louisiana's, which operated under a 25-year interstate charter that eventually led to a number of public corruption scandals In California, as gold began to be discovered in large quantities, people began betting and gambling on just about everything, and just about anywhere. All throughout the west, the attitude of governments both state and local was to legalize, license, regulate, and reap the benefits of gambling. Eventually, professional gamblers again began to be accused of social problems, yet the attitude out west was to simply ban specific games (but not their variants). Soon, in a display of national unity, lynching begun to occur with just as much frequency as it did in the South. As state laws became stronger, the essentially made no difference between the bettors and the organizers of gambling, formal or informal. And within the span of some 30 years too-- though during the same period of time, San Francisco still managed to display and provide access to the first slot machine in the U.S. in 1895, which would not be outlawed until 16 years later. Strangely enough, San Francisco enjoyed greater fame as a gambling paradise than all of Nevada, especially with the number of Chinese gaming parlors (which were the targets of discriminatory law enforcement prosecution). Los Angeles experienced a boom in Hispanic owned parlors (which were also singled out by the authorities). So by the beginning of the 1900s, 35 states had anti-gaming language written into their constitutions, and by 1910, almost every single form of gambling was illegal in the U.S. Arizona and New Mexico had to even promise to outlaw gambling in order to be admitted into the Union. That wasn't to say illegal gambling didn't occur (and flourish without bribing law enforcement). So far so good, until the Great Depression, which tempted a number of states to allow bingo parlors and legalized gambling for charitable purposes. By the early 1930s, horse racing was allowed again in 21 states (thanks to mechanical betting systems). Yet as certain forms of gambling became legalized, others became the target of sever legal punishment-- especially slot machines and other games operated by mob interests in New York, Chicago, and other places east of the Mississippi. Suddenly, the West seemed like a neat place to visit. West Coast crime interests were still thriving out in San Francisco, yet were feeling the brunt of heightened legal scrutiny. So the only place left to go was the desert. Nevada, never a state to turn down gambling dollars, took about 40 years to make gambling legal (mostly to prevent law enforcement from becoming corrupt). Once it did, it literally absorbed the gaming trade from Los Angeles and San Francisco, including mobsters like Bugsy Siegel (although today, you must have a clean criminal record in order to get a gaming license). From the 1930s until the 1950s, gambling (particularly that funded by crime money) managed to escape federal scrutiny until the Kefauver congressional hearings, which examined organized crime's ties to the gaming industry. Eventually the hearings, and legislation it produced, forced criminal concerns to sell their holdings to legal companies. This meant that gaming once again became the target of-- you guessed it-- major social ills. Strangely enough, though, lotteries were still tolerated (though illegal), even involving those held in other countries (possessing tickets were illegal in most states for these lotteries). As states, in the 1960s, were forced to consider higher taxes, the idea of state-sponsored lotteries gained popularity as means to increase revenue (noticing a trend here?). Between 1964 and 1971, a number of states tried to make these ventures profitable, with New Jersey becoming the first state to do so-- mostly because the playing fee was low, the prizes were big, and the action was constant. Congress, strangely enough, lacked the popularity to encourage a national lottery during the same time frame. Seven years later, New Jersey would become the second state (after Nevada) to legalize gaming in casinos, as a way to help stabilize the economy of the seashore resort town Atlantic City. Nevada and New Jersey enjoyed immense popularity as domestic gaming centers for a while, until consistently cheap airfares made transport to beach resorts in Florida, the Bahamas, and the Caribbean more accessible. New Jersey was hit harder than Nevada by the loss of gaming volume, but both also had to contend with the rise in popularity of electronic arcade-style slot and card game machines, which could be placed in storefronts, restaurants, and other locations, without the need for fancy casino trappings (at least in those states where gaming is allowed-- not that that stopped anyone). Eventually, those offshore gaming centers outside of the United States became home to a growing number of online services for placing bets, hosting games of chance and contests, regulated outside of the authority of United States law. Keep in mind one important point: gambling within a number of states is legal. Gambling across state lines, however, is a violation of federal law. Even within the borders of states that allow nonprofits to conduct gaming for charitable purposes, there may be a ban on online gaming (as is the case in California) as a condition to conduct such activity. Federal Law and Gambling In an attempt to address the state of gambling in America, Congress passed a law in 1996, signed by President Clinton shortly thereafter, establishing a National Gambling Impact Study Commission. NGISC was charged with the study of the social and economic impact of gambling from the federal to local level on just about every entity in communities and the broader American society. The nine members of NGISC began their research and fact-finding in August 1996, issuing a final report and set of recommendations in June of 1999. Chapter 5 of that report is of particular interest, as it focused on Internet gambling. This document is significant in that three recommendations were proposed:

1. a federal ban on any online gaming not already allowed in the United States, which would be enforced through compliance by Internet Service Providers, credit card companies, wire transfer services, and any business facilitating electronic commerce services;
2. legislation from Congress that would ban electronic wire transfers to gaming websites, and the banks that service them;
3. coordination and strengthening of state laws prohibiting individuals from accessing gaming websites and online accounts used for payments to and deposits from online gaming services-- in their homes.

As Margaret Smith Kubiszyn notes in her September 2000 GigaLaw article on online gaming, recent attempts at regulating Internet gambling in the United States generally rest in one of two areas, online casino and sports betting services. Casino games involve electronic payments (like credit cards) to participate in online games of chance, like card games and slot machines, while sports betting involves wagers on the results of any number of sporting events. The concern around online casino games is that they are particularly attractive to children and gambling addicts, thanks to engaging multimedia features. Moreover, although sports betting services rely upon events whose outcomes cannot be influenced by an online service (discrepancies can be checked by looking at sports news), online casino games are potentially open to hackers or tampering such that outcomes can be rigged. Sports betting gets special attention thanks to something called the U.S Interstate Wire Act of 1961, more commonly known as the Wire Wager Act. This prohibits interstate and foreign betting or sharing of information through wire communications on sporting events. Interestingly, while federal law prohibits interstate gambling, sports bets can be processed through booking agents based in Nevada from all over the United States. Any individual who places a bet directly with a "bookie" in most states, however, is conducting an illegal activity. This law is central to most of the efforts to actually prosecute online gaming operators. In fact, one year ago this month, a New York jury convicted a San Francisco, California operator of an online sports betting site housed in Antigua for accepting a bet from a resident of New York (where gambling is illegal). In January 2000, a Los Angeles, California gambling website had to pay a US$1.3 million settlement ($500,000 of which went to nonprofit charities!) because it operated an illegal online horse racing service. The major obstacle, however, to successful prosecution of online gambling in the United States to date is the simple fact that most, if not all, of the reported 1400 online gaming websites in operation sit on servers housed in nations where online gambling is legal, but a growing number of participants live in areas like the United States where both hosting and participation in such activity remains illegal. Twenty-seven nations regulate, instead of ban, Internet gaming activity-- including nations like Antigua, Costa Rica, Curacao, Dominican Republic, Grenada, Honduras, St. Kitts and Nevis, St. Vincent, Trinidad, and Turks and Caicos Islands, which play host to a large proportion of companies that provide servers and services to facilitate online gambling. At roughly the same time the NGISC report was released, notes Kubiszyn, the U.S. Senate Judiciary Committee (and three months later the House Judiciary Committee) passed bills that banned online sports and casino websites. Congress' session ended, however, before each chamber could consider both bills. In early 2000, the House held hearings on online gambling, and in April, the House Judiciary Committee approved a bill, sponsored by Representative William Goodlatte (R-VA), which meted out a US$20,000 fine and up to four years in jail terms for operators of online gambling services. There was an exemption from legal action, however, for Internet Service Providers-- who would have been required to use filtering or other means to block access to online gambling sites. Interestingly, there was an exemption from the ban for online services providing access to lotteries (sponsored by states) and pari-mutuel betting. Pari-mutuel activity involves bettors who make wagers on, say, the top three finishers in a race-- like horse or dog racing. The purse is split among the winning bettors, minus the percentage given to the entity managing the bet. Unfortunately for the proponents, the bill was placed on the House suspension calendar, which meant that it could only be brought to the floor with no amendments, 40 minutes of debate, and hurdle of a 2/3 majority of votes for passage; it fell short by 25 votes. Even with similar legislation being reintroduced in the current session of Congress, many folks are wondering how such a law could be enforced. Many of the host servers for such servers, moreover, are mirrored by other servers whose exact identity and location are masked such that if a service is required to shut down, it can be resumed under a new identity, URL, and business name in a matter of hours. In addition, the burden would be placed on individual ISPs to determine not online what gaming sites are violating federal law, but also which of their service subscribers are based within areas where the gaming is permitted and not permitted. This is why groups that consider online gambling immoral (like the Christian Coalition), groups concerned about the loss of revenue from overseas betting operations (like the Nevada Gaming Commission), online and offline civil liberties groups, and Internet gaming interests (like the Interactive Gaming Council) all lobbied hard to defeat the bill. To make things more interesting, also factor in the range of devices that can now access the Internet. For example, Matt Hamblen's 3/26/01 Computerworld piece points out the wireless industry's deliberation around access to two popular online vices, gambling and pornography, via cell phones and wireless devices. There is a lot of interest within the industry to develop self-regulation approaches before Congress and/or federal agencies like the Federal Trade Commission and Federal Communications Commission develop solutions itself. Concerns are recognized that, because of the increasing prevalence of handheld devices, there is a heightened possibility that underage audiences, those addicted to such services, and employees in office environments with their own devices have no barriers to accessing the services. Service carriers can, under federal law, block access to subscribers to certain services at their discretion. Federal law also, however, prohibits the sharing of gambling information via the Internet in America, yet cannot target those services operating overseas. Resources "Gambling in California" (1997) Roger Dunstan http://www.library.ca.gov/CRB/97/03/crb97003.html National Gambling Impact Study Commission (NGISC) http://www.ngisc.gov NGISC June 1999 Recommendations http://www.ngisc.gov/reports/finrpt.html Margaret Smith Kubiszyn September 2000 GigaLaw article on Online Gambling http://www.gigalaw.com/articles/kubiszyn-2000-09-p1.html U.S Interstate Wire Act of 1961 [18 U.S.C. § 1084] http://www.law.cornell.edu/uscode/18/1084.shtml Matt Hamblen 3/26/01 Computerworld article http://www.computerworld.com/cwi/stories/0,1199,NAV47-68-84-88-93_STO58996,00.html [no spaces] "UBIT"-uary for Charitable Online Gambling? But we're leaving out one last crucial piece of the online gaming riddle for nonprofits. Consider:

• the fickleness of public attitudes towards gaming and gambling as a good thing when done for fun, and a bad thing when done professionally;
• the ubiquity of public goods and services underwritten in part by gaming revenues;
• the patchwork quilt of individual state and local laws and regulations regarding gaming activities, federal law which grants protection to some forms of offline gaming versus others yet prosecutes online gaming based largely on a potentially antiquated notion of electronic transmissions;
• and the inability to effectively maintain a consistent international framework for addressing permissible and non-permissible gaming activities and minimum standards for entities to follow to prevent (or curb) societal and cultural concerns (such as access to these services by minors and gaming addicts)

Now add what the Internal Revenue Service has to say. IRS Publication 3079 lays out some fairly basic, yet extremely important, information for any nonprofit organization considering gaming/gambling for fundraising. While it does not explicitly mention Internet-related gambling, groups would be well-advised to give it a review. What follows is a summary of some key points, but should only be used as a starting point for consideration, not a legal opinion. As always, please consult with your organization's counsel for details and questions about the issues raised here. Remember that 501(c)(3) organizations are granted their tax-exempt status, in part, for operating "exclusively for religious, charitable, scientific, testing for public safety, literary and educational purposes, fostering national and international amateur sports competitions, or preventing the cruelty to children and animals." 501(c)(3)s organizations are further subdivided into public charities and private foundations. Public charities are those that receive substantial portions of support from government or direct/indirect public contributions. Private foundations, however, receive more than a 1/3 of their support from gifts, grants, contributions, and membership fees, but not more than 1/3 of their support from what is considered unrelated business income. If a "substantial" source of support for nonprofits with tax-exempt public charity status comes in the form of gaming that generates income unrelated to the purpose for which the nonprofit was granted its exemption, the organization is opening itself up to unrelated business income tax (UBIT). UBIT comes from revenue derived from regularly-conducted activity not "substantially" related to the purpose for which an organization was exempted.

• 501(c)(3)s cannot be organized to conduct gaming, even charitable, and the tax-exempt status may be jeopardized if the gaming (or revenue derived from gaming activities) results in private benefit to individuals or is used for private purposes.
• 501(c)(4) organizations, like civic leagues, social welfare organizations, and the like, cannot conduct gaming as a primary activity, but can conduct gaming if it helps to foster better bonding that ultimately promotes better social welfare.
• 501(c)(5) organizations (like unions) and (c)(6) organizations (like business leagues) cannot conduct gaming without raising questions of UBIT.
• 501(c)(7)s (social and recreational clubs), (c)(8) (fraternal and beneficiary societies), (c)(10)s (domestic fraternal societies and orders), and (c)(19)s (veterans' organizations and auxiliary units) can conduct gaming activities involving only their membership without raising the question of UBI, but do run that risk when their gaming is open to the public.

There are, however, four basic exclusions to UBIT granted to gaming activities by nonprofits:

• certain types of bingo games that are allowed in particular states and localities that do not pose competition with existing commercial operations, and conducted so that all activity-- from the wagering to the distribution of prizes-- takes place in the presence of all participants
• activity in which "substantially all" work and services are provided without compensation-- especially meaning that things down to food and drinks are provided as gratuities, and not as reimbursement for services
• activity conducted within the framework of an exposition or fair, in compliance with sate law, in a limited window of time
• non-bingo gaming conducted within the state of North Dakota after 10/22/86

UBIT entails no insignificant amount of record keeping and form filing, and if not paid, can result in no small amount of financial penalty. So again, if you are entertaining thoughts of operating an online gambling/gaming operation to help your nonprofit, discuss your options with your counsel, think about the impact of the service on your organization, and check to see if the activity is allowed in the first place. Resources Internal Revenue Service Publication 3079 http://ftp.fedworld.gov/pub/irs-pdf/p3079.pdf [Adobe PDF Document]