Anyone who owns real estate in Arizona, or just about anywhere else, knows that property taxes are inescapable. Unless you are a government agency, a church, or a charity, you pay property taxes or (eventually) you lose your property. The types of property that are exempt from property taxes, or more accurately the types of uses of property that cause the property to be exempt from property taxes, are established by Arizona law.
It never occurred to me, until I happened to be reading about some recent United States Supreme Court decisions, that at least in some states, some real estate owned by foreign countries is also exempt from property taxes. The case that caught my eye, The Permanent Mission of India to the United Nations, et al. v. City of New York, New York, is really about a federal law that spells out the conditions under which a foreign government can be sued in United States District Court. The thing that made it interesting to me, however, was the practical application of the property tax laws that were the cause of the dispute.
It seems that under New York law, property in that state is exempt from property taxes if it is owned by a foreign government and is used exclusively for diplomatic offices or for the quarters of a diplomat “with the rank of ambassador or minister plenipotentiary” to the United Nations. Now, in New York this could cover a fair amount of pretty valuable real estate in the neighborhood of the United Nations headquarters in Manhattan. For whatever reason, however, the legislature of New York decided that it would be a good idea to grant a property tax exemption to foreign governments as long as the property is used for the specified purpose.
What really caught my attention, however, was the Supreme Court’s description of the particular properties that were the subject of the case:
The Permanent Mission of India to the United Nations is located in a 26-floor building in New York City that is owned by the Government of India. Several floors are used for diplomatic offices, but approximately 20 floors contain residential units for diplomatic employees of the mission and their families. The employees—all of whom are below the rank of Head of Mission or Ambassador—are Indian citizens who receive housing from the mission rent free.
Similarly, the Ministry for Foreign Affairs of the People’s Republic of Mongolia is housed in a six-story building in New York City that is owned by the Mongolian Government. Like the Permanent Mission of India, certain floors of the Ministry Building include residences for lower level employees of the Ministry and their families.
The government of India owns a 26 story building in New York City that is used solely for its Mission to the United Nations? The government of Mongolia owns a six story building in New York City for its Ministry for Foreign Affairs?
The case goes on to describe how property tax liens work. A tax lien represents an unpaid tax which is an encumbrance on the property. The lien remains attached to the property until the tax is paid or until the lien is foreclosed, even if the owner sells the property without paying the tax. The tax lien gives the owner of the lien (which can be the government or a private party who acquires the lien from the government) an interest in the property.
The question that the Supreme Court had to decide was whether enforcement of a tax lien involves an interest in “immovable property.” If it does, then New York City could sue the governments of India and Mongolia in federal court to enforce tax liens on their buildings.
So, did the government of India and the People’s Republic of Mongolia have to pay property taxes on their buildings? Yes they did, because parts of their buildings were used for purposes that didn’t fit the exemption. As the Court explained:
If a portion only of any lot or building … is used exclusively for the purposes herein described, then such portion only shall be exempt and the remainder shall be subject to taxation.
For several years, the City of New York (City) has levied property taxes against petitioners for the portions of their buildings used to house lower level employees. Petitioners, however, refused to pay the taxes. By operation of New York law, the unpaid taxes eventually converted into tax liens held by the City against the two properties. As of February 1, 2003, the Indian Mission owed about $16.4 million in unpaid property taxes and interest, and the Mongolian Ministry owed about $2.1 million.
The case presented to the Supreme Court was really about whether tax liens can be enforced against a foreign nation in federal court. The Court said yes they can, so the government of India and the People’s Republic of Mongolia have to pay New York City $16.4 million and $2.1 million, respectively, or they will lose their properties. My hunch is that they will pay the taxes.
I guess I’m ignorant of the realities of world diplomacy. I find it surprising, and rather amusing, that the People’s Republic of Mongolia would own Manhattan real estate. Imagine the size of the building that the People’s Republic of China must own for its diplomatic mission to the United Nations. If any portion of the property is used for a non-exempt purpose, then that People’s Republic will have to pay New York property taxes, too.