In the 1983 case Franchise Tax Board of California v. United States Postal Service, the Supreme Court ruled that a state tax agency could not require the U.S. Postal Service to withhold taxes from the wages of its employees and remit them to the state. The court held that such an action would violate federal law, which grants immunity to federal agencies from state taxation or regulation unless Congress has explicitly waived this immunity. In this case, there was no explicit waiver by Congress allowing states to impose their income tax withholding requirements on federal entities like USPS. Therefore, it was determined that USPS is immune from California's attempt to enforce its wage garnishment laws against it.

In the dissenting opinion for the case Franchise Tax Board of California v. United States Postal Service, Justice O'Connor argued that Congress did not intend to grant federal instrumentalities blanket immunity from state taxes when it enacted 39 U.S.C. §401(1). She contended that such an interpretation would lead to absurd results and create a broad exemption never intended by Congress. Instead, she believed that this provision should be interpreted as only granting immunity where there is clear evidence of Congressional intent to do so. In her view, no such evidence existed in this case; therefore, the Franchise Tax Board should have been allowed to levy its tax on the Postal Service's leasehold interest.