What annual compliance procedures must a Nebraska county, city, or village follow to run a keno lottery?

Plain-English summary

This is a gaming-compliance checklist, not a tax ruling. Nebraska cities, counties, and villages that run a keno lottery (as "sponsors") must follow annual compliance procedures drawn from two sources: the Nebraska County and City Lottery Act and the County and City Lottery Regulations. The procedures can be performed by the sponsor's own representative or by a contracted professional.

Two steps must be done during an unannounced visit while keno is being conducted (for any sponsor using a manual ball draw):

1. Unannounced observation (at least annually). "Unannounced" means no one involved in the keno operation gets advance notice of the date or time (Regulation 35-616.01).
2. Verify the draw is run correctly. Confirm at least three lottery workers are involved in drawing the 20 keno numbers during a manual draw, without exception (Neb. Rev. Stat. § 9-607(4)) -- an automated draw system may use fewer. Watch that: the game number is recorded on a blank draw ticket; one worker calls the ball numbers from the "rabbit ears"; a different worker records them; the keno manager verifies the drawn numbers against the rabbit ears, the draw ticket, and the system before computing the game; and the selection method in use matches the method on file with the sponsor and the Department. Confirm the manager's signature/initials evidence the verification.

The remaining ongoing/periodic checks:

• Automated draws: verify management did a next-day review of all "no read" and duplicate-number occurrences, with a written log (Reg. 35-621.06J).
• Video review: for at least five games each month from two different weeks, confirm the recording clearly shows the empty and full rabbit ears/wheel, date/time, and game number; that winning numbers match the draw ticket and transaction log; that discrepancies were reported to the Department; and that tapes aren't reused until compliance procedures are done (Regs. 35-613.04C and 35-621.06C series).
• Monthly game summaries: reconcile gross proceeds and prize payouts from the keno system's transaction log to the monthly summary (Reg. 35-616.01).
• Bank deposits: confirm gross proceeds less cash prizes are deposited into a separate bank account within five business days (Neb. Rev. Stat. § 9-650; Reg. 35-622.03E), that no player used a debit card to deposit more than $200 to a player account in a single day, and that interest on the sponsor's share is properly transferred to the sponsor.
• Cash over/short: examine any overage or shortage over $25 per keno writer, per shift, per day, and report unresolved discrepancies (Reg. 35-622.03D).
• Prize pay tables: confirm the system's active pay tables match the published tables, with a log of updates (Reg. 35-614.05).
• Prize-payment security: verify funds are guaranteed -- an insured account, an irrevocable letter of credit, or another Department-approved form (Regs. 35-613.11 series).
• Records: maintain all lottery records per Schedule 59 and Reg. 35-622, stored at a location other than where keno is conducted.
• Annual report: file the Nebraska County/City Lottery Report, Form 35K, within 90 days of the sponsor's fiscal year-end, using the same accounting method as the quarterly county/city lottery tax returns (Reg. 35-622.04).

Where transaction volume makes a monthly procedure impractical, the sponsor may ask the Department in writing to use an alternative procedure, but may not use it until the Department approves in writing.

What this means for you

Cities, counties, and villages sponsoring keno (and their lottery operators/sales outlets)

Treat this as your annual keno self-audit program. The manual-draw observation must be genuinely unannounced and confirm the three-worker minimum and the call/record/verify roles. Keep the recurring pieces on schedule -- next-day automated-draw reviews, monthly video and summary reconciliations, five-business-day segregated deposits with the $200 debit-card cap, cash over/short review above $25, pay-table and prize-security checks, and records retention off-site. Close the year by filing Form 35K within 90 days of fiscal year-end. If volume makes a step impractical, get written Department approval before switching to an alternative.

Contracted compliance professionals

You can perform these procedures on the sponsor's behalf; document manager verification (signatures/initials), report discrepancies to the Department, and preserve the written logs the regulations require.

Common questions

Q: How many workers must run a manual keno draw?
A: At least three lottery workers must be involved in drawing the 20 numbers during a manual ball draw, without exception (Neb. Rev. Stat. § 9-607(4)); an automated ball-draw system may use fewer.

Q: How fast must keno proceeds be deposited, and where?
A: Gross proceeds less cash prizes go into a separate bank account within five business days (Neb. Rev. Stat. § 9-650; Reg. 35-622.03E). No player may use a debit card to deposit more than $200 to a player account in a single day.

Q: How much video has to be reviewed?
A: At least five games each month, taken from at least two different weeks within the month, checked against the draw ticket and transaction log.

Q: What annual report is required, and when?
A: The Nebraska County/City Lottery Report (Form 35K), filed with the Department within 90 days of the end of the sponsor's fiscal year, using the same accounting method as the quarterly county/city lottery tax returns.

Q: Can a sponsor use a different procedure than the ones listed?
A: Only after submitting a written request and receiving the Department's written approval; the alternative can't be used before approval.

Citations and references

• Neb. Rev. Stat. § 9-607(4) -- minimum three lottery workers during a manual keno ball draw.
• Neb. Rev. Stat. § 9-650 -- gross proceeds, less cash prizes, deposited into a separate lottery bank account.
• Nebraska County and City Lottery Act and the County and City Lottery Regulations (including Regs. 35-613, 35-614.05, 35-616.01, 35-621.06, 35-622 series) -- the sources of the compliance requirements.
• Form 35K (Nebraska County/City Lottery Report) -- the annual report filed within 90 days of the sponsor's fiscal year-end.
• Schedule 59 - County/City Lottery Records -- the records-retention schedule approved by the Records Management Division of the Nebraska Secretary of State's office.

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/revenue-rulings-issued-tax-commissioner
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/rulings/rr351003_comp_proc.pdf

Original ruling text

ANNUAL COMPLIANCE PROCEDURES OF THE KENO ACTIVITY OF
COUNTIES, CITIES, AND VILLAGES
The compliance requirements pertaining to the conduct of keno are derived from two sources:
(1) The Nebraska County and City Lottery Act; and
(2) The County and City Lottery Regulations.
Procedures may be conducted either by the sponsor’s representative or a contracted professional.
Compliance Requirements 1 and 2 must be performed during an unannounced visit while keno is being
conducted for all sponsors who use a manual ball draw method for selection of the winning numbers.

1. COMPLIANCE REQUIREMENT: An unannounced observation of the keno activity must be made at
   least annually for all sponsors who use a manual ball draw method for selection of winning numbers
   during the conduct of a keno lottery. Regulation 35-616.01.
   PROCEDURE: For the purpose of this requirement, unannounced means that no individual involved
   directly or indirectly with the operation of the keno lottery will have knowledge of, or be given any
   advance information regarding the dates or times of, the observation. In addition to observing the
   operation of the keno activity, the steps outlined in Procedure 2 must be performed.
2. COMPLIANCE REQUIREMENT: Regulations 35-613.03L, 35-613.04, 35-613.04A, 35-613.04B,
   35-613.04B(1), 35-613.04B(2), 35-613.04B(3), and Nebraska County and City Lottery Act, Neb. Rev.
   Stat. § 9-607(4).
   PROCEDURE: During the unannounced visit, observe five keno games and verify that the keno
   operator (lottery operator or sales outlet location) has a minimum of three lottery workers involved
   during the drawing of the 20 keno numbers when a manual ball draw method of winning number
   selection is used, without exception. A keno lottery using an automated ball draw system may be
   conducted with less than three lottery workers as prescribed in Regulation 35-621.06B.
   The sponsor’s representative should observe that:
   a. The number of the game being drawn is recorded on a blank keno draw ticket;
   b. One lottery worker calls the ball numbers as they enter the rabbit ears;
   c. A different lottery worker enters the numbers on the draw ticket on which the number of
   the game is recorded;
   d. The keno manager verifies the numbers drawn by comparing the rabbit ears to the draw
   ticket and to the numbers entered into the keno system prior to computing the game; and
   e. At the time of the unannounced visit, the lottery operator is using the method of winning
   number selection which agrees with the designated selection method on file with the
   sponsor and the Department.
   Practical Guidance: Determine that the manual draw tickets are verified by the keno manager,
   as evidenced by the signature or initials of the manager, in addition to observing the conduct
   of the game. Determining the method of winning number selection may be accomplished at the
   unannounced visit or by reviewing the transaction log if the number selection method is designated
   on the log.
3. COMPLIANCE REQUIREMENT: Regulation 35-621.06J
   PROCEDURE: Sponsors who use an automated ball draw method of winning number selection
   must verify that keno management personnel have performed a next-day review of all “no read”
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and duplicate number occurrences. A written log of reviews must be maintained by the lottery
operator or sales outlet location where the automated ball draw equipment is in use.

4. COMPLIANCE REQUIREMENT: Regulations 35-613.04C(1) through 35-613.04C(5) and Regulations
   35-621.06C(1) through 35-621.06C(6).
   PROCEDURE: View the video tape or digital recording for a minimum of five games for each
   month (from at least two different weeks within each month) to determine that the following items
   are in compliance with the regulations –
   a. The video tape or digital recording has a clear image to show (1) the empty rabbit ears or
   wheel, (2) the date and time, and (3) the full rabbit ears or wheel. The video tape or digital
   recording must also show the game number or the time and date which will relate to the
   game number.
   b. The winning numbers drawn per the video tape or digital recording agree with the draw
   ticket prepared by a lottery worker in the case of a manual ball draw, and the winning
   numbers are recorded on the transaction log. Verify that all discrepancies were reported
   to the Department, by the lottery operator, sales outlet location, or sponsor. Report all
   discrepancies not previously reported directly to the Department. Compare the time of
   the video tape or digital recording to the transaction log; also examine any procedures
   which would allow the lottery operator or sales outlet location the opportunity to affect the
   outcome of the keno game.
   c. The video tapes are retained and are not reused until the sponsor has performed the
   compliance procedures on the tapes and has released the tapes.
5. COMPLIANCE REQUIREMENT: Regulation 35-616.01.
   PROCEDURE: Verify the accuracy of monthly game summary information provided by the lottery
   operator, by reconciling the gross proceeds and prize payouts from the keno system’s transaction
   log, to the monthly summary information.
   Practical Guidance: The Department recommends that this procedure be conducted on a monthly
   basis. If the volume of transactions warrants it, the sponsor may submit a written request to
   Department detailing an alternative procedure they would like to use. The sponsor may not use the
   alternative procedure until written approval by the Department is received.
6. COMPLIANCE REQUIREMENT: Regulation 35-622.03E and Nebraska County and City Lottery
   Act, Neb. Rev. Stat. § 9-650.
   PROCEDURE: Determine that the gross proceeds of the keno lottery, less prizes paid in cash,
   are deposited into a separate bank account of the sponsor or lottery operator. On a monthly basis,
   reconcile the deposits per the daily cash summary and the transaction log to the keno operations
   bank account, to determine that the proper amount has been deposited within five business
   days and report any discrepancies. Verify no player used a debit card to deposit more than $200
   to a player account in a single day.
   Practical Guidance: If the volume of transactions warrants it, the sponsor may submit a written
   request to Department detailing an alternative procedure they prefer to use. The sponsor may not
   use the alternative procedure until written approval by the Department is received.
   Determine that the amount of interest credited to the sponsor’s share of the gross proceeds while
   in the custody of the lottery operator has been properly transferred to the sponsor. Any interest
   earned on the sponsor’s share of the gross proceeds due to any time lag in remittance to the
   sponsor is the property of the sponsor, not the lottery operator.
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7. COMPLIANCE REQUIREMENT: Regulation 35-622.03D.
PROCEDURE: Examine any cash overage or shortage in excess of $25 per keno writer, per shift,
per day, and report unexplained and unresolved discrepancies and irregularities.
Practical Guidance: Report the lottery operator’s and sponsor’s actions with respect to the
unexplained overage or shortage.

8. COMPLIANCE REQUIREMENT: Regulation 35-614.05.
   PROCEDURE: The computer-generated prize pay tables for all types of wagers must agree with
   the published prize pay tables. Verify that the lottery operator has a procedure to maintain a log
   of all updates and changes to the prize pay tables and that the active prize pay tables on the keno
   system agree with the published prize pay tables.
9. COMPLIANCE REQUIREMENT: Regulations 35-613.11, 35-613.11A, and 35-613.11B.
   PROCEDURE: Examine the financial security provided for prize payments to verify that the funds
   are guaranteed and in compliance with the regulations.
   Practical Guidance: The funds must be insured or guaranteed by (1) funds deposited into an insured
   account maintained at a financial institution, (2) an Irrevocable Letter of Credit issued by a financial
   institution, or (3) another form of security approved by the Department.
10. COMPLIANCE REQUIREMENT: Regulation 35-622.
    PROCEDURE: Ensure that all lottery records are maintained as prescribed in Schedule 59 - County/
    City Lottery Records approved by the Records Management Division of the Nebraska Secretary of
    State’s office and Regulation 35-622.
    Practical Guidance: Records required to be maintained must be stored at a location other than the
    actual locations where the keno lottery is conducted.
11. COMPLIANCE REQUIREMENT: Regulation 35-622.04.
    PROCEDURE: The sponsor must file a Nebraska County/City Lottery Report, Form 35K, for
    the annual period corresponding to the sponsor’s fiscal year. The report must be filed with the
    Department within 90 days of the end of the sponsor’s fiscal year.
    Practical Guidance: Form 35K must be prepared using the same method of accounting used for the
    quarterly county/city lottery tax returns. Indicate whether the cash basis or accrual basis is used, or
    identify the specific method if another method is used.

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