Online Lotteries: Risky Business?

The lotto mantra that "You've got to play to win" means little when you're eyeing the California jackpot and you live in Rhode Island. But a Web site called Lottery Universe, run by Houston, Texas-based Avatar Group, says it has a way anyone online can play the Texas state lottery as well as California's and a handful of other states, no matter where they live.

The only problem: Federal law forbids reselling lottery tickets. Avatar, which has been in business for over two years, maintains Lottery Universe is legal because it acts only as a "service agent" that buys tickets for you through normal channels, and doesn't actually sell lottery tickets, says John Feldman, an attorney representing Avatar. (Avatar principal Wayne Krouse declined comment.) "It's like calling your brother in-law in Florida and asking him to buy a lottery ticket for you," Feldman says. But the difference, say numerous state attorneys general (including Florida's), is that it's illegal to charge or accept a fee to cross state lines to buy a lottery ticket for someone else. Only authorized retailers can sell lottery tickets, they say. You can buy one for a friend, but you're not supposed to charge them for it. For its part, Avatar maintains that the ticket isn't resold, and it never leaves the state.

The Texas State Lottery Commission is among those that disagree with Avatar's view. It submitted a report to the Harris County District Attorney's office last year alleging that Avatar violates the Texas State Lottery Act by acting as a middleman--selling state lottery tickets above face value--which would be a third-degree felony. Feldman says Avatar assesses a handling fee. The Harris County DA's office is investigating the case and has not yet determined whether Avatar is breaking Texas law.

In the interim, it is business as usual for Avatar, which claims 66,000 visitors monthly do business with Lottery Universe.

Net Rekindles Old Debate

Lottery Universe is not unique. Pay a visit to Interlotto or TheBigBigLotto.com and you can play the state lottery in Florida, New York, and California, according to both sites. If you think New Jersey might bring you better luck, you can try The New Jersey Lottery Online.

These Web sites have rekindled an old debate over access to state-run lotteries by out-of-state third parties. Entrepreneurs have long tried to find ways to make a business out of giving gamblers a chance to play out-of-state lotteries using a telephone or even by mail.

They largely failed, as lottery laws were updated to close loopholes presented by emerging technologies. But now a growing number of lottery Web sites are once again bringing the issue to a head.

At a minimum, state lottery commissioners say, these sites are troublesome, primarily because these firms are not regulated by official state lottery commissions.

"There is no guarantee you are actually buying tickets or you will be able to collect prizes if you win," says Ken Hart, general counsel with the Florida Lottery Commission. Representatives of lottery commissions also voice concern that age verification measures don't ensure all lottery players are of legal age.

Legal Interpretations

PC World tried to speak with official spokespersons for the four sites mentioned, which all purport to allow people to buy lottery tickets from various U.S. states over the Internet. Lottery Universe was the only one that was willing to discuss its business.

According to Avatar attorney Feldman, Lottery Universe is legal because it doesn't actually sell lottery tickets.

"Lottery Universe is simply a service provider that allows consumers to purchase lottery tickets from authorized dealers," Feldman says. "There is no loophole, because [Lottery Universe] is not involved in selling lottery tickets at all."

Here's how Lottery Universe operates: It imposes a $1 service charge to buy and hold a lottery ticket for you. At the Lottery Universe Web site you can play the Texas, Florida, and California state lotteries, as well as the multistate Mega Millions and Powerball games. For an additional fee, you can have a lottery ticket scanned and displayed on an Internet server located in the state in which the ticket was purchased, according to Feldman. You can view the images of the tickets over the Internet.

"Lottery tickets stay within state lines at all times," says Feldman.

Because federal laws prohibit lottery tickets purchased in one state (including ticket receipts) from traveling across that state's border into another, Lottery Universe breaks no laws, according to Feldman. If you win less than $600, Lottery Universe credits an account you set up with the firm. If you hit it big, you have to come get the ticket in person. Lottery Universe wouldn't say whether it has had any big winners.

State Policies Vary

Some gaming commissions say Lottery Universe's interpretation is tenuous at best. California lottery officials point to a 1999 Official Opinion issued by the California Attorney General's office. That opinion concludes: "A person may not, on behalf of another, purchase California state lottery tickets from an authorized retailer and charge a fee for the services rendered." California Lottery officials say they are looking into Avatar's business because they suspect Lottery Universe is breaking California law by doing precisely what the attorney general says California law prohibits.

Because Lottery Universe offers access to the lotteries of several states, as well as the multistate Powerball game, it has drawn the attention of lottery organizations such as the North American Association of State and Provincial Lotteries. The association's chief operating officer, Ken Brickman, who is also executive vice president of the Iowa State Lottery, says that despite laws prohibiting lottery sales over the Internet, he can't say for sure whether sites that act as lottery ticket purchasing agents violate Iowa laws. He wouldn't confirm or deny any pending online lottery investigations.

Lottery officials in Florida say the state doesn't actively go after Internet-based lotteries ever since it lost a 1992 Second Circuit Court of Appeals case to Illinois-based Monticello Communications, which marketed Florida lottery tickets across state lines.

"Lottery ticket brokers aren't in violation of Florida laws," says Hart, the Florida Lottery Commission attorney. The circuit court in Tallahassee ruled for Monticello Communications, saying that because the firm charged only for the service of buying tickets and charged consumers the face value of lottery tickets, it was lawful in Florida.

Feds Move to Squash Net Sales

Over the last decade, companies like Monticello Communications and Lottery Universe have challenged laws in several states over their desire to sell out-of-state lottery tickets, says Anthony Cabot, chair of the Gaming Practice Group at Lionel Sawyer & Collins, based in Las Vegas, Nevada.

The U.S. Justice Department cracked down on online lotteries in 1995 when it sued a Pennsylvania firm called Pick-A-State that sold Texas lottery tickets in Pennsylvania. At the time the firm was legal under a loophole in federal laws that said giving lottery players receipts for tickets, instead of original tickets, was legal.

The loophole was quickly closed that same year when President Bill Clinton signed a federal crime bill into law. The measure restricts the procurement of lottery tickets across state lines for the purpose of interstate wagering. It says, in part, that it is illegal to conduct the business of "procuring for a person in one State...a ticket...in a lottery...conducted by another State."

How this law affects Avatar is unclear. Justice Department spokesperson Casey Stavropoulos says the DOJ is concerned about all permutations of online gambling, but declines to comment on interstate lottery sales over the Internet. Stavropoulos won't say whether any Internet lotteries are now under investigation.

Law Enforcement Quandary

"As a practical matter, gambling crimes are low priority," says I. Nelson Rose, a Whittier Law School professor and expert on gambling law. "Selling lottery tickets over the Internet isn't like selling heroin."

The handful of states PC World contacted for this report each expressed concern about Net-based lottery ticket sales. However, many state lottery commissions and law enforcement officials say privately that they are frustrated by a lack of resources to go after online lottery sites.

Meanwhile, some states are moving closer to offering lottery ticket sales online themselves. The state of Georgia is considering a measure to let Georgia residents use credit cards or checking accounts to play up to $5 in lottery numbers online every day. Last year, the annual meeting of the North American Association of State and Provincial Lotteries debated the matter. Its conclusion: Individual states should decide whether to allow in-state lottery ticket sales online. No state has yet launched an online lottery.

Online lotteries are a separate issue from virtual casinos, which are another regulatory challenge. Gambling online is illegal in the United States, so the servers are housed outside its borders to escape legal restrictions. Congress has tried to make it hard to sink virtual cash into online slots and card tables by prohibiting the use of credit cards for such "purchases."

However, overseas gambling sites have prospered where the U.S. has no authority. Online gambling worldwide will rake in $5.7 billion in profits this year, according to Christiansen Capital Advisors. About $1 billion of those profits are from fees associated with facilitating the sale of official lotteries in Europe and around the world, including U.S. states. No analysts contacted for this story track how many people play state lotteries online.