When you write your sweepstakes rules, namely the official rules, it’s customary to disclose the approximate retail value (or “ARV) of the prize the you’re giving away. In fact, many state laws and other local regulations require that businesses include the ARV.
To help you get started with writing your official rules, here is what you need to know about the ARV.
What Is the Approximate Retail Value (ARV)?
The ARV is an exact monetary value that the prize is supposedly worth if it were to be redeemed for cash. For a cash prize, the ARV is simply the dollar amount of the prize. However, for non-cash prizes, the ARV may vary.
The method of determining a non-cash prize ARV varies from company to company. Some companies list the cost to purchase the prize, the advertised retail price of the product or the Manufacturer’s Suggested Retail Price (MSRP) as the ARV.
Why Is It Important to Have the ARV in Your Sweepstakes Rules?
Aside from including the ARV because it is required by law, there is another reason you want to include it: taxes.
The IRS will determine the amount of taxes that the winner owes on the prize based on the Fair Market Value (FMV) of the prize. The FMV refers to the current market value that the winner could potentially sell the prize for.
If a prize winner receives a prize that has an ARV of $600, your company will need to send them an IRS Form 1099-MISC. You will also have to file IRS Form 1096 directly to the IRS.
In some states, your sweepstakes may also have to be registered and bonded. New York and Florida require that companies register and bond their sweepstakes if the total ARV of the prizes exceeds $5,000.
In Rhode Island, there is no bonding requirement but the registration requirement applies if the prize is worth $500 or more and if the sweepstakes is conducted by a brick and mortar business with promotions taking place inside of a retail location.
This is essential for your promotion to be considered as a legal sweepstakes in those states.
How Do You Calculate the ARV?
While the ARV might be easy to calculate for some prizes, in other cases it could be a bit more complicated.
Here are some basic rules to follow:
Base ARV on the Retail Value Not Your Cost
Some companies base the ARV on the cost that they paid for the prize. However, if you received the prize at a significant discount from the prize distributor, this amount may be significantly different than what the prize winner would pay if they purchased the prize for themselves.
Therefore, you should always disclose an ARV for the retail value, not what it cost your business to obtain the prize.
Use a Standard Formula for Travel Prize ARV Calculation
Travel prizes are one of the most difficult categories of prizes when it comes to determining ARV. This is because the trip hasn’t occurred yet and airfare and accommodation rates can fluctuate significantly based on the date of travel and departure and arrival locations.
Therefore, you should use this standard formula to calculate the ARV of a travel prize:
- Obtain quotes from multiple travel agencies and online websites for the exact dates that the winner will use the travel prize.
- Base the ARV on the average of these quotes along with the rate that your company is willing to pay for airfare, accommodations, ground transportation, and any other amenities that are included in the travel prize.
Take care in your calculation of the ARV for your prizes as the winner may decide to dispute the ARV in order to lower their tax bill since the amount of taxes owed is based on the FMV.
In fact, winners are more likely to challenge the ARV on a travel prize for this very reason.
Make Sure to Calculate the Total ARV
Some companies overlook calculating the total ARV for all of the sweepstakes prizes combined. Don’t ignore this in your official rules, especially if it is possible for the winner to purchase all of the prizes as a bundle at retail value.
If you don’t calculate the total ARV, a winner could tally it on their own and then dispute it if it turns out to be higher than the FMV for the prizes purchased as a bundle.
Calculating ARV for your sweepstakes rules can be complicated. It’s highly recommended that you retain legal counsel to help you determine the ARV and assist you with any registration and bonding requirements that may arise.
Need help with sweepstakes or contest management? Call 305–505–5393 or email us with your questions.
