In the 1935 case of Colgate v. Harvey, State Tax Commissioner, the U.S. Supreme Court ruled that a Vermont tax law violated the Contracts Clause of the Constitution by taxing income derived from out-of-state bonds and mortgages more heavily than in-state ones. The plaintiff, Gilbert Colgate, was a New York resident who owned bonds secured by mortgage on real estate located outside Vermont but had to pay higher taxes because his securities were not based in Vermont. He argued this was discriminatory and unconstitutional under Article I Section 10 (the Contract Clause) which prohibits states from passing laws impairing contractual obligations. The court agreed with him ruling that such differential treatment constituted an impairment of contract rights protected by the federal constitution.

In the dissenting opinion for Colgate v. Harvey, Justice Stone argued that the majority's decision was inconsistent with previous rulings of the Court and violated principles of federalism by interfering with a state's ability to manage its own tax system. He contended that Vermont’s income tax law did not discriminate against holders of federal securities because it applied equally to all forms of intangible property, including those issued by corporations or other states. Furthermore, he believed that exempting interest on U.S government bonds from taxation did not constitute discrimination but rather reflected a policy choice made by Congress in order to make these bonds more attractive to investors. Therefore, according to Justice Stone, there was no constitutional basis for striking down Vermont’s law as discriminatory against holders of federal securities.