In the 1892 case of California v. San Pablo and Tulare Rail Road Company, the U.S Supreme Court ruled in favor of the railroad company, stating that it was not liable to pay taxes on bonds owned by non-residents of California. The State had imposed a tax on all franchises, roads, roadbeds or rights-of-way made or granted to any railroads incorporated under its laws. However, the court held that such taxation violated both due process and equal protection clauses as they were discriminatory against out-of-state bondholders who did not use or benefit from state services funded by these taxes. Furthermore, it was determined that this type of taxation interfered with interstate commerce which is constitutionally regulated by Congress alone. This decision reinforced federal supremacy over states' rights when dealing with matters related to interstate commerce.

In the dissenting opinion for California v. San Pablo and Tulare Rail Road Company, Justice Field disagreed with the majority's ruling that a state could not tax federal property. He argued that this decision was inconsistent with previous rulings of the court which allowed states to impose taxes on national banks and other federally chartered institutions. Furthermore, he contended that if a state cannot tax federal property within its borders, then it would be at an unfair disadvantage because it would have to provide services such as police protection without receiving any compensation in return. Therefore, Justice Field believed that states should have the power to levy taxes on all properties located within their boundaries regardless of who owns them.