In the case of Duffy, Collector of Internal Revenue v. Central Railroad Company of New Jersey (1924), the United States Supreme Court was asked to determine whether a tax imposed by Congress on transportation companies for every passenger carried in their cars, boats or vessels could be applied to passengers who were transported entirely within one state. The Central Railroad Company argued that this tax violated its rights under the Commerce Clause and Due Process Clause of the Constitution because it interfered with intrastate commerce and amounted to an unlawful taking without just compensation. However, Justice Sanford writing for a unanimous court rejected these arguments stating that while Congress cannot regulate purely local activities under its commerce power, it can impose reasonable taxes on such activities as long as they have some relation to interstate commerce or serve some other legitimate federal interest. He further noted that since railroads are instrumentalities of interstate trade and transportation even when operating solely within one state's borders, they fall within congressional taxing authority.

In the dissenting opinion for Duffy v. Central Railroad Company of New Jersey, Justice Holmes argued that the majority's interpretation of tax law was incorrect and overly narrow. He believed that Congress intended to impose a tax on all transportation companies, not just those directly involved in interstate commerce. By exempting intrastate businesses from taxation, he contended that the court was creating an unfair advantage for these companies and undermining federal authority over taxation matters. Furthermore, he disagreed with the majority's assertion that taxes could only be levied against activities specifically mentioned in legislation; instead arguing it should be interpreted more broadly to include all related activities within its scope.