The U.S. Supreme Court issued a ruling last week that made some New Yorkers very happy… And could have serious worldwide tax implications.

The Supreme Court ruled 7–2 that American courts may hear matters involving foreign governments and property taxes. The ruling now clears the way for New York City to collect the so-called “pillow tax” from diplomatic missions and consulates to the United Nations.

Under New York State law, a property owned by a foreign government is exempt from tax if it is used exclusively for diplomatic offices or as housing for an ambassador or a senior minister. The “pillow tax” is the common term for the property tax that New York City hopes to collect from nations using missions to the United Nations for non-diplomatic purposes, such as providing living quarters for certain staff.

The ruling is important from a tax policy (and foreign policy) standpoint because it confers jurisdiction on American courts for matters involving property tax which “run with the property” rather than with the person or country. Previously, missions and consulates were believed exempt from property tax. In cities like New York, that exemption resulted in the loss of millions of dollars.

New York initially filed the suit against the Indian and Mongolian missions to the United Nations; taxes for those countries alone involved more than $25 million. Those governments argued that they were exempt from paying the tax because of diplomatic sovereignty granted in under a 1976 federal law, the Foreign Sovereign Immunities Act. However, in writing for the majority, Justice Clarence Thomas declared, “Property ownership is not an inherently sovereign function.” The Supreme Court decision upheld the ruling issued last year by the United States Court of Appeals for the Second Circuit, in Manhattan.

The Supreme Court’s decision will likely encourage Washington, D.C., and others to now aggressively seek taxes from consulates and other diplomatic property.

So what does that have to do with you? Well, the potential fall-out from this ruling has many lawyers, advisors, and policy-makers on edge. The ruling could result in strained relations with other foreign countries depending on how zealously New York City, Washington, DC, and other American cities chase to collect taxes. Good for the folks in those cities because it is money in the coffers, but bad for future relations.

Even worse? What if those countries turn the ruling on its ear and claim a similar lack of an exemption for American consulates and diplomatic missions abroad? What if those in India demand that the US pays the pillow tax? What about our other friends? Chances are that New York just opened up a big can of tax worms – the fallout from this ruling will be worth watching.