What’s the difference between a contest, sweepstakes and lottery?

Contests, sweepstakes and lotteries are all useful mechanisms for promoting a company online. But only some can be done legally, so businesses need to know the difference between them, however, if they’re going to use one as a marketing tool or offer a giveaway for their business.

What’s a contest?

A contest is an event in which people try to win by doing something better than others. In a contest, the winners are chosen or judged based on their submission or their performance in the contest. A contest is sometimes referred to as a game of skill.

Contests may require entrants to write a response, take a photo, answer trivia questions or do other things involving skill. The amount of skill versus chance that can be present in a contest varies from state to state and too much chance can land a promotion in the definition of a sweepstakes or a lottery.

What’s a sweepstakes?

A sweepstakes is a promotional drawing in which prizes are given away at no charge to the participants. Winners are selected at random. It’s important to note: sweepstakes must generally be available at no charge (no purchase or consideration necessary to enter). And compared to a contest being a game of skill, sweepstakes are a game of chance.

The winner must be selected at random – for example, using a service like Random.org to ensure true randomness.

What’s a lottery?

A lottery is a means of raising money by selling numbered tickets and giving prizes to the holders of numbers drawn at random. For example, think of school fundraisers with raffles or your state’s lottery. The winner is chosen at random, like in a sweepstakes, but entrants have to pay to play (unlike a sweepstakes). A lottery is essentially a game of luck that has an entry fee.

Every state has strict laws barring private lotteries, however, and most lotteries for promotion of a business are going to be illegal lotteries. Sweepstakes must differentiate themselves from lotteries in order to stay within the law. Usually this is done by taking away the element of consideration (aka sweepstakes are usually free whereas lotteries are not).

Why do I need to know this?

If your business is going to offer a contest or a sweepstakes, you must create official rules and you must make sure the sweepstakes is legitimately different from a private lottery. For a contest, for example, the criteria that is being scored and judged must be outlined in your rules to ensure that the judging process is fair for all entries. Some states will require you to register your promotion. In some instances, you will also need to report the winnings to the IRS or state taxing authorities.

Contact us if you need to learn more about how to set up official rules for your contest or sweepstakes.