may have purchased tickets while on a casual trip across the border."
There are companies, such as The Lotter, that cater to nonresidents over the Internet. The
Lotter operates through online partners such as Lottery USA that take Internet orders, while
local representatives in the United States actually buy the official tickets. The tickets are held by
the local office, with scanned copies sent to the purchasers. "Should you win a large sum of
money, you may need to travel to collect your win in person," The Lotter says on its website,
thelotter.com. The company says it assists buyers with the required documentation and even
provides a free flight.
While The Lotter will pay for winners' air fare, it won't pick up their U.S. tax tab, if there is one,
when they go to the state lottery commission to collect. Mary Neubauer of the Iowa Lottery said
her state will withhold 30 percent from the winnings of a person who is not a U.S. resident, plus
another 5 percent for Iowa taxes.
The IRS says lottery winnings not effectively connected with a trade or business are considered
"other income" under the fixed or determinable annual or periodic provisions of section
871(a)(1)(A) and are taxed at a flat rate of 30 percent unless a tax treaty provides otherwise.
That position is supported by the holdings in Barba v. U.S., 52 A.F.T.R. 2d 83-5272 (1983), and
Park v. Commissioner, 136 T.C. 569 (2011)
, the IRS said.
While the current U.S. model tax treaty says lottery winnings are subject to U.S. tax, 27 treaties
do not have similar provisions, Berg said. The Canada-U.S. treaty
clearly establishes that a
Canadian resident who wins a U.S. lottery will owe U.S. tax, Berg said. "Since under Canadian
domestic law, lottery winnings are not taxable, you don't get a tax credit in Canada [for U.S.
taxes paid] because the income wasn't taxable in Canada," he said. Canada taxes lottery and
gambling proceeds only if the winnings rise to the level of business income.
Milan Patel of Anaford AG said a Swiss resident who wins the Powerball would be subject to
U.S. withholding at 30 percent, regardless of whether the ticket was purchased outside the U.S.
or while the winner was in the U.S. on vacation.
Australian's Blanket Bet on Virginia Lottery
One of the more interesting tussles over the issue involved an Australian syndicate that
attempted to buy all 7 million possible combinations in a Virginia lottery in 1992. The syndicate
had the support of the state lottery commission until the tide of public opinion turned and the
state stopped cooperating. "A newspaper got whiff of it, and the Virginia Lottery panicked
because it was worried the general public would lose faith in the lottery," said George C. Howell
III of Hunton & Williams LLP, who represented the syndicate in a subsequent court case. "It's
not easy to go down to the 7-Eleven . . . and buy up all 7 million tickets."
Without the commission's help, the Australians were able to buy only about 5 million tickets, but
that proved enough to win the $27 million jackpot. Howell said the commission first tried to deny
payment on technical grounds but eventually decided to pay after the syndicate threatened legal
action. "But then they said, 'By the way, per federal regulations, we have to withhold federal
tax,'" Howell said.
Howell's firm subsequently received a letter from the IRS, saying that withholding was not
required under the Australia-U.S. tax treaty if the syndicate could certify that it was exempt from
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