When we write the official rules for your sweepstakes or contest, we need to determine and disclose the approximate retail value (or “ARV”) of each prize you are awarding. And, while some prizes are very easy to attribute a value, others may be a bit more tricky.
- Your cost vs. retail value. Many Sponsors consider the ARV to be determined based upon the cost they may have paid for the prize. But, if the Sponsor received a significant discount from the prize distributor, that may not work. The ARV should be based upon the actual amount the winner would pay if they purchased it themselves. So, if you are awarding a TV selling at retail for $1,000, you would disclose an ARV of a$1,000, not the cost you paid (i.e. discounted 50% to $500).
- Determining value of trips prior to departure. Trips are often the most difficult to attribute retail value because they haven’t occurred yet and rates (especially airfare) fluctuate considerably depending upon the day the flights are booked and locations of departure and arrival. As an industry standard, we use a formula to calculate the ARV, based upon the average cost of airfare per person, average cost of ground transportation, hotel rate the Sponsor is willing to spend per night, etc.
- Tax implications. If prize winners receive prize(s) in excess of $600, they will receive an IRS form 1099 at the end of the year to report the misc. income to the IRS. Here’s where it gets interesting. Although we must disclose the ARV in the Official Rules and other marketing materials (as legally required), the IRS determines the amount of taxes owed by the winner based upon the Fair Market Value (or “FMV”). The FMV is the current market value that the winner could sell the prize for, and is what a winner may want to include on their tax return. Advise them to speak to their personal tax preparer if they have questions!
It’s important to know the various formulas involved in order to avoid disputes with winners when tax time rolls around. We will assist in determining the correct ARV and FMV when we write the Official Rules, procure and fulfill prizing and issue 1099’s at the end of the year. We won’t leave you guessing.