In the 1938 case of Felt & Tarrant Manufacturing Co. v. Gallagher et al., the U.S. Supreme Court ruled in favor of Gallagher, upholding a California law that imposed an annual franchise tax on corporations operating within its borders based on their net income from all sources, both inside and outside the state. The court held that this did not violate either due process or equal protection clauses under the Fourteenth Amendment nor was it contrary to interstate commerce clause as claimed by Felt & Tarrant Manufacturing Co., a corporation incorporated in Illinois but doing business in California as well. The company argued that taxing out-of-state earnings violated constitutional protections against states interfering with interstate commerce and depriving entities of property without due process of law. However, Justice Benjamin Cardozo writing for majority stated that there is no constitutional mandate prohibiting such taxation provided it's fairly apportioned to reflect activities conducted within the state. This decision affirmed states' rights to levy taxes on businesses operating within their boundaries even if they are headquartered elsewhere or earn profits across multiple jurisdictions.

In the dissenting opinion for Felt & Tarrant Manufacturing Co. v. Gallagher et al., the justice argued that the majority's decision to uphold a state law imposing a tax on out-of-state corporations was unconstitutional and violated principles of interstate commerce. The justice believed that this type of taxation placed an undue burden on companies conducting business across state lines, which is protected by the Commerce Clause in Article I, Section 8 of the U.S Constitution. Furthermore, they contended that such laws could lead to retaliatory measures from other states and potentially disrupt national economic unity. They also expressed concerns about potential discrimination against foreign corporations as it might discourage them from doing business within certain states due to these additional taxes imposed upon them.