The State Department is about to launch a tax war on foreign diplomats living in the United States. And it already has enlisted local governments in the Washington area for the fight.
At issue is the sales tax exemption granted foreign diplomats. In the past, foreign diplomats have been entitled to exemptions from all U.S. sales taxes. But later this month, under a program to be announced by the State Department this afternoon, diplomats will be required to pay state sales taxes in direct proportion to the sales and value-added taxes U.S. diplomats in corresponding countries are required to pay.
District of Columbia tax officials yesterday predicted that envoys from "a good number" of countries, including "some surprises," will not receive any tax exemptions at all. J. Walter Lund, associate director of the District of Columbia Department of Finance and Revenue, said he did not know which countries would be involved but that it "stands to reason" that European Economic Community nations might be among them. Lund said most of the Common Market countries levy a value-added tax, which is included in the purchase price and is not refunded to U.S. diplomats.
The new policy is aimed at recovering much of the $15 million to $20 million U.S. missions and their staffs abroad spend annually for sales and value-added taxes.
The tax-exemption regulations will take effect Feb. 15 in the District of Columbia, Maryland and Virginia, according to spokesmen for the three governments. A D.C. official said the program eventually will become nationwide. The State Department would not comment on the new program until this afternoon's announcement, a spokesman said.
The new tax rules are the latest regulations issued by the State Department under a 1982 law that gives this country more leverage in negotiating better treatment for U.S. diplomats overseas; the law established the Foreign Missions Office to administer the policies. Last summer, the State Department's Office of Foreign Missions began issuing new diplomatic automobile license plates, charging fees equivalent to those charged American emissaries overseas and controlling the issuance of auto titles and registration.
Under the new tax regulations, foreign envoys will be issued one of several cards, ranging from one that permits total exemption from sales taxes to other cards allowing progressively less exemption, according to Lund. Diplomats from some countries no longer will be eligible for any exemptions, he said.
The city government, with the help of the Foreign Missions Office, already has started telling merchants and other businesses in the city about the new program that affects the city's 6 percent sales tax, Lund said.
A blue-striped card exempts the bearer from all sales taxes and hotel occupancy taxes, and a card with a green stripe will excuse the bearer from all taxes except those charged for hotel rooms. In the District, the 10 percent tax on hotel bills plus a $1 per room, per night charge can add up to a substantial sum.
Red-striped cards specify three levels of exemptions -- on purchases over $50, over $150 and over $200. The total specified on the card must be spent in a single transaction before a tax exemption is granted, D.C. merchants were told.
The estimated 5,000 foreign diplomats and their families in the Washington area will be required to show their card each time they make a purchase. Members of foreign embassies will be required to apply individually for their cards, Lund said.
In the past, the District government issued each foreign government an exemption number that was used on cards passed out to embassy staff, he said. The system was easy to abuse, Lund said. "There are probably many exemption cards that should have been withdrawn long ago, all over the country" because it was "easy to pass them around," he added.
In announcing the program in Maryland, State Comptroller Louis L. Goldstein told the state's merchants that "previously issued cards will not be valid" after Feb. 15 and that businesses "should not assume that previously exempted diplomats will be issued new cards." The comptroller's office sent color photographs of samples of the new cards with its announcement. Maryland levies a 5 percent tax on retail sales.
The Virginia Department of Taxation will send out copies of the cards to the state's merchants as soon as they get the samples from the State Department, said Danny Payne, director of tax policy. Virginia's 4 percent sales tax is affected by the new policy.
Officials for the three governments said they could not estimate how much their revenue could be expected to increase as a result of the new policy.