In the case of Central Pacific Railroad Company v. California, the U.S Supreme Court ruled in favor of Central Pacific Railroad Company in 1895. The state of California had imposed a tax on the company's franchise, which was granted by Congress to build part of the transcontinental railroad. The court held that this taxation violated federal law as it interfered with federal authority and control over interstate commerce and transportation infrastructure. It further stated that states cannot tax franchises or privileges granted by Congress under its constitutional powers because such taxes would infringe upon those powers. Therefore, any attempt by a state to levy such taxes is unconstitutional.

The dissenting opinion in the Central Pacific Railroad Company v. California case argued that the state of California had no right to tax federal bonds held by a private corporation, as it would interfere with federal operations and undermine national sovereignty. The dissenters believed that this taxation was unconstitutional because it violated the principle of intergovernmental tax immunity, which prevents one level of government from taxing another. They contended that allowing states to impose such taxes could potentially lead to financial instability if other states followed suit, thereby affecting the ability of the federal government to borrow money for public purposes. Furthermore, they asserted that these types of taxes were discriminatory against out-of-state bondholders who might be taxed twice on their income - once by their home state and again by California.