In the case of Oklahoma Tax Commission v. United States in 1942, the Supreme Court ruled that a state cannot impose an income tax on income earned by a Native American living on tribal land from employment with the federal government. The court held that such taxation would infringe upon tribal sovereignty and interfere with federal authority over Indian affairs. This decision was based on principles established in earlier cases which recognized tribes as distinct political entities within U.S territory but under direct federal jurisdiction, not subject to state law unless Congress has explicitly provided otherwise. Therefore, it concluded that states do not have inherent power to tax residents of Indian reservations without express authorization from Congress.

In the dissenting opinion for Oklahoma Tax Commission v. United States, Justice Frank Murphy argued that the majority's decision to exempt income derived from restricted Indian lands from state taxation was not supported by federal law or policy. He contended that Congress had never intended to grant such a broad tax exemption and noted that previous court decisions had upheld state taxes on income generated by Indians from their own property. Furthermore, he asserted that this ruling could potentially disrupt states' abilities to collect revenue and may lead to unfair treatment of non-Indians living in close proximity with tribal members who are now exempted from certain taxes. In conclusion, Justice Murphy believed the Court overstepped its bounds in creating an unwarranted protection against state taxation for Native Americans.