In the 1904 case of Delaware, Lackawanna and Western Railroad Company v. Pennsylvania, the U.S. Supreme Court ruled in favor of the railroad company, striking down a Pennsylvania law that imposed taxes on freight transported both within and across state lines by railroads incorporated outside of Pennsylvania. The court found this tax to be unconstitutional as it violated both the Commerce Clause and Equal Protection Clause of the Fourteenth Amendment. The Commerce Clause prohibits states from interfering with interstate commerce while the Equal Protection clause prevents states from treating entities differently based solely on their place of incorporation or business operations location. Therefore, taxing out-of-state corporations at a higher rate than in-state ones was deemed discriminatory and unlawful.

In the dissenting opinion for Delaware, Lackawanna and Western Railroad Company v. Pennsylvania, Justice Harlan argued that the majority's decision was inconsistent with previous rulings of the Court regarding interstate commerce. He contended that a state has no power to tax property located outside its borders or to impose taxes on operations conducted entirely within another state. The justice believed that by allowing Pennsylvania to tax coal mined in other states but transported through its territory, it effectively allowed one state to control and limit trade between other states - an authority which he asserted belonged solely to Congress under the Commerce Clause of the Constitution. Furthermore, he expressed concern about potential retaliation from other states leading to a breakdown in free trade among them if such taxation were permitted.