PA Small Games of Chance 60/40 Split: Allowed Uses and Reporting

Pennsylvania’s 60/40 split for small games of chance applies to club licensees: nonprofits that hold both a small games of chance license and a liquor license. At least 60% of gaming proceeds must go to public interest purposes, and no more than 40% can be retained by the club. Both portions have to be spent within one year of the end of the calendar year in which the proceeds were collected.1Pennsylvania General Assembly. Pennsylvania Code 10 PS 328.502 – Distribution of Proceeds

How the Split Is Calculated

The statute at 10 P.S. § 328.502 uses the word “proceeds,” not “net proceeds.” After prizes are paid out, the money left over is what feeds the 60/40 formula. If a club collects $50,000 from pull-tabs and pays $30,000 in prizes, the $20,000 that remains splits into at least $12,000 for public interest purposes and no more than $8,000 kept by the club.

Both sides of the split carry the same one-year spending deadline. The 60% must be paid out for public interest purposes within one year of the end of the calendar year the money came in. The 40% the club keeps has to be spent inside that same window. The one way to hold funds longer is to notify the Department of Revenue that the club is saving for a substantial public interest purchase or project.2New York Codes, Rules and Regulations. Pennsylvania Code 10 PS 328.502 – Distribution of Proceeds

A pandemic-era provision had let club licensees redirect the 60% toward their own operating expenses for calendar years 2020 through 2022. That exception expired on December 31, 2022. The standard 60/40 rule is fully back in force.2New York Codes, Rules and Regulations. Pennsylvania Code 10 PS 328.502 – Distribution of Proceeds

Who the 60/40 Rule Covers

A “club licensee” is any eligible nonprofit that holds both a small games of chance license and a liquor license. Many VFW posts, American Legion halls, and fraternal lodges fit the definition, which is why the 60/40 split is the governing rule for those organizations.

If your organization does not hold a liquor license, the 60/40 split does not apply to you, but the rule is stricter rather than looser. All proceeds must be used exclusively for public interest purposes, purchasing games of chance, or paying the license fee. There is no 40% cushion for general operating expenses.3Dauphin County. Pennsylvania Code Title 10 PS Charities and Welfare – Local Option Small Games of Chance Act An organization whose primary purpose is itself a public interest, such as a volunteer fire company, can spend proceeds directly on that purpose, since firefighting is a recognized public interest category.

What the 60% Can Pay For

The 60% has to go to a “public interest purpose” as the Act defines it. The categories are broad but finite, and spending outside them is grounds for losing the license. Recognized uses include:

  • Activities of a nonprofit providing benevolent, charitable, religious, educational, philanthropic, scientific, patriotic, social welfare, public health, public safety, environmental, historic, or civic benefits.
  • Supporting or maintaining public buildings, parks, or similar community infrastructure.
  • Voluntarily taking on functions that government would otherwise need to provide.
  • Maintaining or repairing real property owned or leased by the organization, as long as the property is used for one of the qualifying purposes above.
  • Nonprofit youth athletic programs.
  • Activities related to volunteer fire, ambulance, or rescue operations.
  • Scholarships, economic or social support for veterans, activities honoring veterans, and other qualifying purposes conducted by veterans’ organizations.3Dauphin County. Pennsylvania Code Title 10 PS Charities and Welfare – Local Option Small Games of Chance Act

Two mistakes come up often. The first is buying real property. The statute excludes purchasing or constructing new property unless it will be used exclusively for one of the qualifying purposes listed above. Renovating the existing hall to keep it operational qualifies. Buying a vacant lot with vague future plans does not.

The second is spending that benefits the membership instead of the public. Free dinners for members, personal gifts, and subsidized social events for the roster are not public interest purposes. Organizations with 501(c)(3) status face a second layer of risk on top of state license action: the IRS treats gaming revenue that enriches insiders as private inurement, which can jeopardize the federal tax exemption.4Internal Revenue Service. Inurement/Private Benefit – Charitable Organizations

What the 40% Can Pay For

The 40% the club retains is the portion available for the club’s own use, subject to the same one-year spending deadline and the limits already noted on buying new real property and on member-benefit spending. If a club wants to hold a portion of the 40% beyond a year to fund a substantial public interest purchase or project, it has to notify the Department of Revenue; otherwise the money has to be spent inside the window.2New York Codes, Rules and Regulations. Pennsylvania Code 10 PS 328.502 – Distribution of Proceeds

Reporting and Bank Account Rules

Club licensees with proceeds exceeding $20,000 in a calendar year must file an annual report with the Pennsylvania Department of Revenue.5Pennsylvania General Assembly. Pennsylvania Code 10 PS 328.501 – Club Licensee The report is due by February 1 for the preceding calendar year and must be filed under oath by an authorized officer.6Pennsylvania Department of Revenue. Small Games of Chance It has to include:

  • Proceeds from each game of chance, broken down by week.
  • Prizes paid, broken down by week.
  • Other costs related to running the games.
  • Verification and itemization of amounts distributed for public interest purposes.5Pennsylvania General Assembly. Pennsylvania Code 10 PS 328.501 – Club Licensee

These reports are not private. The Department of Revenue posts them, so anyone can check whether a club met the 60/40 requirement. The Department also sends a copy to the Bureau of Liquor Control Enforcement, which ties gaming compliance directly to the club’s liquor license.

Any eligible organization with proceeds exceeding $40,000 per year must maintain a separate bank account used only for gaming funds. Records of all income and expenditures from that account must be kept for at least two years.7Pennsylvania General Assembly. Pennsylvania Code 10 PS 328.307 – Licensing of Eligible Organizations Even below the $40,000 threshold, running gaming money through the general operating account makes the 60/40 math nearly impossible to prove. A separate account makes it verifiable at a glance.

What Happens If a Club Misses the Split

Failing to comply with the distribution requirements of § 328.502 is listed by name as grounds for suspension, revocation, or nonrenewal of the gaming license. So is spending gaming revenue on anything other than public interest purposes, game purchases, or purposes permitted under the club licensee provisions in Chapter 5. Filing a false or inaccurate report, or failing to file at all, is a separate ground for the same action.8Pennsylvania General Assembly. Pennsylvania Code 10 PS 328.701 – Grounds for Suspension, Revocation or Nonrenewal of License

The consequences do not stop at the gaming license. Because the Bureau of Liquor Control Enforcement receives a copy of every compliance report, a club licensee that mishandles its 60/40 split can see its liquor license drawn into the problem too. For an organization that qualifies as a club licensee precisely because it holds both licenses, that is the compounding risk behind the distribution rule.