How Some Stores Cheat the Lottery, and Cost States Money

by | January 28, 2015

By Jeffrey Stinson

Retail store owners and clerks are hitting lottery jackpots too often, spurring states to crack down on a variety of scams that cheat rule-abiding players _ and divert money from state coffers.

The scams tarnish state-run gambling operations that give people a chance to win big money while consoling them with the knowledge that their losses will pay for public education or other government services. In recent months, there have been incidents in several states. Among them:

In December, the Asbury Park Press newspaper found that half of New Jersey's 20 most frequent lottery winners since 2009 were either licensed retailers or family members of store operators. As a group, they collected 840 prizes totaling about $1.8 million. Most often, they ostensibly beat 10,000-to-1 odds to claim payouts on Pick 4 tickets.

In Michigan in November, the state's auditor general found 37 store owners turned in winning tickets worth about $3.6 million in 2012 and 2013. One retailer collected 107 prizes worth $346,312 in 2013. In addition, six store owners didn't report more than $500,000 in lottery winnings on their 2012 tax returns. The findings are under investigation. In October, CBS2 News in Los Angeles reported that retailers across Southern California cashed in tens of thousands of dollars in winning tickets purchased at their stores.

And in March, The Palm Beach Post newspaper revealed that serial Florida jackpot winners, many of them store owners or operators, defied incredible odds to claim thousands of dollars in winnings. The most prolific winners cashed in tickets worth $600 or more every 11 days.

Players spent about $70 billion last year on tickets in the 44 states and the District of Columbia that have lotteries, according to figures compiled by the North American Association of State and Provincial Lotteries (NASPL). The states received nearly $20 billion in net proceeds to finance government programs.

Most often, lottery officials say, the scams involve retailers who are cashing in winning tickets for a fee for people who don't want to collect their jackpots personally because they owe back taxes, child support payments or other debts that states generally deduct from lottery winnings. Or, they're in the country illegally.

States generally require prizes of $600 or more be claimed in person, and winners must show identification and their Social Security numbers. In addition to deducting delinquent taxes or other debts owed the state, states withhold federal and state income taxes from the payouts of larger prizes, usually $5,000 or more.

"If you have a $5,000 winning ticket but you are here illegally, you go to a buddy or find a store clerk, and you split it or give him $1,000 for cashing it," said lottery aficionado Richard Lustig of Florida. Lustig has studied how lotteries operate, won the grand prizes in seven different lottery games and authored a players' guide, "Learn How to Increase Your Chances of Winning the Lottery."

Another scam involves unscrupulous retailers who shortchange unsuspecting customers who have returned to the store to scan their tickets. Clerks will tell them they've won less money than they really have, pay them the lesser amount and then claim the bigger prize money.

"(The clerk) sees a $500 winning ticket, but says you won $20," Lustig said of this scam. "He gives you $20 and then goes and cashes the ticket."

The elderly or unsophisticated are often the victims, he said.

Both of the schemes _ whether ripping off taxpayers or unsuspecting players _ are a headache for state lottery officials who must devote people and time to police the integrity of the games by investigating possible fraud and building cases to send to prosecutors.

"The bottom line is: We're trying to stay a step ahead of the criminal element," said Terry Rich, CEO of the Iowa Lottery and NASPL's president. "We have to have integrity. Everyone has a stake in that _ the governments that receive the taxes and the people who play."

Stateline | Nonpartisan, Nonprofit News Service of the Pew Center on the States | editor@stateline.org  |  @pewstates