In the 1918 case Dakota Central Telephone Company et al. v. State of South Dakota ex rel. Payne, Attorney General, et al., the U.S Supreme Court ruled on a dispute between a telephone company and the state over taxation issues. The court held that while states have broad powers to tax businesses within their borders, they cannot unfairly discriminate against interstate commerce in doing so. In this case, South Dakota had imposed higher taxes on out-of-state companies than it did on similar in-state businesses which was found to be unconstitutional by the court as it violated principles of equal protection under law and interfered with interstate commerce.

In the dissenting opinion for Dakota Central Telephone Company v. State of South Dakota, Justice McReynolds expressed concern over the majority's decision to uphold a state law that allowed government regulation and rate-setting for telephone companies. He argued that this constituted an unjust taking of property without due process, violating the Fourteenth Amendment. McReynolds contended that while states have power to regulate utilities in public interest, they must not do so at expense of confiscating private property rights or destroying fair return on investment. He believed it was inappropriate for courts to defer entirely to legislative judgment about what constitutes reasonable rates; instead, he suggested courts should independently assess whether regulated rates allow utility owners a just and reasonable return on their investments. The justice feared such unchecked regulatory powers could lead towards socialism where private ownership would be meaningless as all profits are absorbed by state-controlled pricing.