In January, the Ohio Department of Taxation (ODT) launched its Use Tax Education Program (UTEP), a carrot-and-stick approach to collecting unpaid use taxes.

The use tax, kissing cousin to the sales tax, is assessed when a business doesn't have to pay Ohio sales tax, typically on out-of-state purchases or Internet transactions.

Historically, lots of Ohio businesses have ignored the use tax. John Trippier, administrator for ODT's audit division, says 96 percent of ODT use tax audits have resulted in assessments.

Failing to pay use tax not only cuts state revenue, but can make Ohio goods and services appear less competitively priced. Consider a hypothetical from the ODT website: A Cleveland company can buy a $2,600 executive desk from vendors in Columbus or Buffalo. When the Columbus supplier tacks on a 6.75 percent sales tax, the desk looks more expensive--if the Cleveland firm buys from Buffalo without paying use tax. "That's a big reason why the use tax was put in place, to create an even playing field between in-state and out-of-state businesses," says Trippier.

In stage one of ODT's compliance campaign, through Aug. 1, a business that signs a Voluntary Disclosure Agreement will be liable for three years' back tax, plus interest calculated at about 4 percent.

After Aug. 1, ODT will write to 380,000 Ohio businesses that have failed to register for or self-assess the use tax. Businesses that come clean at this stage will pay four years' back tax, plus interest.

Fail to respond to that letter, and your business may be audited and slapped with a bill for up to seven years' back tax, plus interest and as much as 15 percent in penalties. Ouch.

Reprinted from the May 2011 issue of Columbus C.E.O. Copyright © Columbus C.E.O.