Property Tax Post: Diplomatic Exemptions

Last month’s exchange of consulate closures between the United States and Russia highlights the complexity of domestic and international law governing foreign-owned property. It also presents an opportunity to consider the property tax implications of “diplomatic status.”

The unique tax treatment afforded to property owned by foreign governments stems from the Vienna Conventions,[1] which exempt the “premises” of diplomatic missions and consulates from all national, regional, or municipal dues and taxes. Passage of the Foreign Missions Act in 1982 later granted the U.S. State Department broad discretion over the application of this legal principle.

In order to claim the tax exemption, foreign governments are required to seek approval from the State Department’s Office of Foreign Missions (OFM) prior to purchasing property intended for diplomatic or consular use. If approved, the OFM then instructs the relevant state taxing authority to issue an exemption on behalf of the foreign government.

However, parties qualifying for the exemption may still be responsible for service charges that appear on their property tax bill. For example, in Montgomery County, Md., foreign missions remain liable for the “Front Foot Benefit Charge,” which involves payment for water and sewer main construction—distinguished by the State Department as a fee for service. New York similarly compels payment for water and sewage system charges, in addition to ad valorem levies that fund streets, highways, and waterways.

In recent years, the special status of these diplomatic and consular posts has stirred frustration in the District of Columbia. Despite its role as host to foreign embassies, the nation’s capital has no authority to enforce building codes and regulations on these facilities—some of which pose health and safety risks, as explained by Rep. Eleanor Holmes Norton (D-D.C.) in a letter to the State Department. Vacant and blighted buildings are of particular concern in the District, where they are subject to a notably higher tax rate than property classified as residential or commercial. Embassy and consulate relocations over the years have resulted in an increase of these abandoned buildings; however, their diplomatic status prevents the district from assessing any property tax, regardless of classification.

A bill addressing the issue is currently pending in the D.C. Council, though it does not call for the authority to tax the vacant properties. However, it is possible that D.C.'s appeals, both to the State Department directly and the public generally, could result in action. In its reply to Rep. Norton's petition last September, the State Department indicated that it would be willing to "revoke" the diplomatic status of these properties, should all attempts to enforce compliance with building codes and regulations fail.

Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: Should D.C. have the authority to tax abandoned embassies?

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[1] Includes both the Convention on Diplomatic Relations of 1961 and the Convention on Consular Relations of 1963.