Educational Consumer Tips
Better Business Bureau
"Congratulations! You may be a prize winner in our $25,000 cash sweepstakes."
"Enter our $100,000 prize giveaway and win an island vacation and a mink coat."
"You've been selected as a national finalist in our grand giveaway sweepstakes."
Webster's dictionary, 6th edition, defines sweepstakes as "one who wins all the stakes in a game." Better Business Bureau receives many consumer inquiries asking if these sweepstakes promotions are "for real." Others ask if anyone really wins those big prizes. This report provides basic information about sweepstakes promotions.
How are sweepstakes conducted?
Sweepstakes originally were popularized in the 1960's through magazine publishing companies for the purpose of promoting the sale of magazine subscriptions. Although these companies still actively conduct sweepstakes, other types of companies such as stores, fast food restaurants, timeshare resorts and charitable organizations have jumped on the sweepstakes bandwagon.
Sweepstakes promotions are publicized in a variety of ways. Many promotions are offered through the mail. They may appear in "official" looking envelopes of flashy, colorfully printed folders to attract attention; others arrive in postcard form. Some sweepstakes promotions are featured in magazines or on television. In grocery or department stores, they may be found attached to goods or on tear-off pads near featured merchandise.
In order to have the chance to win a sweepstakes, a participant usually fills out and sends an entry form to a company. Winners are usually determined by a random drawing of the returned entry forms. Sometimes the phrase "You may be a preselected winner," is used. In this situation, a computer randomly assigns numbers to a list of names (see following, "How Did the Sweepstakes Promoter Get My Name?"). Perhaps a 1000 persons are selected from a list and each name is assigned a number with one name receiving a designated winning number. These "preselected" participants then receive the sweepstakes and are asked to return their number for a possible win. If the winning number is still not returned, the prizes may not be required to be distributed by the promoter dependent on state law. This latter method is often selected by promoters because if prizes are not distributed it is less expensive for the promoter to conduct.
The winner(s) of the random drawing, or the preselected participant who returns the winning number, receives a prize. In any sweepstakes promotion, the two key ingredients are an element of chance (such as a drawing) and a prize. Federal law mandates that participants cannot be required to purchase anything as a condition of entering a sweepstakes. Purchasers of a company's product or service and those choosing only to enter and not to buy have equal chances of winning in a lawful sweepstakes.
The prizes offered in a sweepstakes promotion provide the major incentive for participation. A highly valued grand or first prize may be offered with any number of second, third, fourth, etc. prizes. Usually as one descends the prize scale, more prizes are awarded with a lower value. For example, there may be one or a limited number of luxury automobile grand prizes awarded while at the fifth prize level, 1000 instant cameras are distributed.
One promoter advised that although prize awards changed every year, its current promotion included money, cars and television sets as major prizes while lesser prizes included stereos, computers and health club memberships. Another promoter stated that in twenty years of promoting sweepstakes, it had awarded 10 million dollars in prize money to the winners of its sweepstakes. The most popular prizes, according to the Direct Marketing Association of New York, are cash, automobiles, travel packages, or technical equipment such as televisions or personal computers.
How Did the Sweepstakes Promoter Get My Name?
Companies get people's names in different ways. Many mailing lists are composed of names taken straight from telephone directories. Other lists are developed with names of people who buy mail order merchandise. A company may sell their customer's names to other companies who compile "lists of names". These "list" companies then in turn rent their lists. The lists of names collected are often identified by certain characteristics. For example, a sweepstakes promoter for a mail order house would probably request a rental list of names where people demonstrated a tendency to purchase items by mail.
Why are Sweepstakes Offered?
The goal of any sweepstakes promotion is to promote a company's product to consumers. As a result, sweepstakes promotions often focus on a product while leading the consumer through the instructions for entry. Sometimes, in addition to a sweepstakes, there may be other promotions included. For example, consumers may be enticed to follow other instructions to receive a bonus gift or varying discounts on mail orders for the company's product - in addition to entering the sweepstakes promotion. In some promotions, the participant may be offered a choice of whether to participate only in the sweepstakes promotion or participate in the sweepstakes and also another activity such as receiving a company's mail order catalog or ordering merchandise. The responses are often divided by a "yes" and "no" box. As stated previously, the consumer has the same chances of winning the sweepstakes no matter which box is selected.
Charitable organizations have also turned to direct mail sweepstakes promotions. By using a sweepstakes promotion, charitable organizations hope to increase fund raising efforts and avoid sending prospective donors "the same old thing". One director of a charitable organization stated that sweepstakes appeals for his organization offered potential donors an extra incentive to give and brought in new money to the organization. Another spokesperson for a charitable group claimed that the sweepstakes appeal was successful in building its donor lists. Commonly, such an appeal includes a description of the charitable cause, an explanation of the sweepstakes game with rules and regulations for contestants, and a precoded "entry certificate." The prospective donor returns the certificates to be entered in the sweepstakes with or without a contribution. Donors are in no better position to win the sweepstakes than non-donors.
Suppose you win a sweepstakes promotion?
As fun as it may sound to win a major prize in a sweepstakes promotion, there is another aspect of winning not often considered at the outset. According to the Internal Revenue Service, a sweepstakes winner is required to pay taxes on the fair market value of the prize won. The fair market value is the price the prize item would sell for on the open market. For example, an individual wins a car with a fair market value of $10,000. This amount should be reported as income for the year on his/her federal income tax forms. The addition of the $10,000 to a person's yearly income would most likely bump a winner to a higher tax bracket subsequently causing an individual to owe more in taxes. In some promotions, taxes may be withheld by the promoter. However, it is ultimately the winner's responsibility to see that the taxes are paid. In many promotions, the phrase, "winner is responsible for all taxes" is noted. Any persons interested in participating in a sweepstakes promotion should consider their ability to pay the taxes if they do indeed win.
Who Regulates Sweepstakes? Federal Regulations
As part of its enforcement activities, the United States Postal Service examines promotions, which may include sweepstakes, that involve the use of the mail. As noted before, sweepstakes cannot require participant payment-such as requiring a purchase of a company's product in order to enter-which would make the promotion a lottery and subject to challenge through postal lottery statutes.
The Federal Trade Commission has jurisdiction over unfair or deceptive acts and promotions. In the past, sweepstakes promotions have been the subject of Federal Trade Commission action. In one case, the Federal Trade Commission charged that one sweepstakes promotion was deceptive in that prizes advertised in the promotion were never awarded to winners.
In addition, the Federal Trade Commission (FTC) has a trade regulation rule requiring retail food establishments and gasoline stations to disclose considerable information when conducting games of chance such as sweepstakes. Under this rule, among other things, it is unfair or deceptive to engage in advertising or promotions which misrepresent the chance of winning. Also, FTC requires the following disclosures:
- the exact number of prizes in each category to be made available during the game promotion and odds of winning;
- the geographic area covered by the game;
- the total number of retail establishments participating in the game; and
- the termination date of the game.
In addition to federal statutes, at least four states (New York, Florida, Maryland and Rhode Island) have passed regulations directly related to sweepstakes.
In New York and Rhode Island, promoters of sweepstakes are required to file certain information with the Secretary of State. In Florida, a sweepstakes promoter must file with the Department of Legal Affairs and also establish a trust account in a national or state chartered financial institution if the prizes offered total more than $5,000. These states also require some degree of disclosure such as rules and regulations of the sweepstakes and value of prizes offered. Other states have also taken action against sweepstakes promoters. Regulators have stated that a court may decide that the time and effort taken by a consumer to visit a retail store to obtain a sweepstakes entry form may be a form of consideration. In other words, sweepstakes have been determined in some states to be lotteries and therefore illegal depending on participation requirements placed on the consumer by the promoter. For further information on state requirements of sweepstakes promotions in each state, contact either the Secretary of State or Attorney General in the state.
While sweepstakes promotions prompt a large volume of inquiries, they have not been a major complaint area for Better Business Bureaus. Of the few complaints received, complainants alleged that they were notified that they had won a first prize in a sweepstakes when in fact they had not won the prize. In other instances, complaints stated that free gifts offered in combination with a sweepstakes promotion were not received, or were not of the value they expected.
The following guides are provided for those who wish to participate in a sweepstakes promotion:
- Read the sweepstakes promotion and any other contents carefully. If you wish to enter, follow directions carefully. One active participant in sweepstakes promotions stated that approximately 25% of all entries are discarded because the specific rules were not followed.
- Determine eligibility requirements for entry. Do you meet these requirements? For example, do you have to be a certain age to participate, etc.
- Do you really want the prizes offered in the sweepstakes promotion? Remember that you are required to pay the taxes on the fair market value of the prizes should you win.
- If you win, are you required and are you willing to release your name and picture to the promoter.
- Remember that the odds of winning are determined by the number of entries received by the company. If you live in a state that requires disclosure of the odds of winning in a sweepstakes promotion, check to determine the chances of your winning a sweepstakes promotion. Because sweepstakes promotions are mailed to many people, the chances of your winning are slim.
Questions and Comments
Comment Submitted 11/28/2013
Sounds great! Thanks.
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