In the case of South Carolina v. United States in 1905, the U.S Supreme Court ruled that a state could not use its tax system to impede federal operations or discriminate against federal property. The dispute arose when South Carolina imposed taxes on liquor owned by the Federal Government and stored in bonded warehouses within its borders. The State argued that it had a right to impose such taxes as part of its inherent sovereignty and police power over all property located within its territory, regardless of ownership. The Supreme Court disagreed with this argument, stating that while states have broad taxing powers under their own constitutions and laws, these powers are subject to certain limitations imposed by the U.S Constitution - one being they cannot interfere with federal functions or discriminate against federally-owned properties. This decision reinforced principles established earlier in McCulloch v Maryland (1819) which held that "the power to tax involves the power to destroy," hence states cannot use taxation as a tool for interfering with constitutional authority vested in Congress.

In the dissenting opinion for South Carolina v. United States, Justice Harlan argued that the majority's decision was a violation of states' rights as protected by the Constitution. He contended that under the Tenth Amendment, powers not delegated to the federal government are reserved to individual states or their people. Therefore, he believed it was unconstitutional for Congress to impose an income tax on state-owned property and assets because this infringed upon state sovereignty and autonomy. Furthermore, Harlan asserted that such taxation could potentially lead to federal control over state resources which would undermine our system of dual sovereignty where both federal and state governments have distinct areas of authority. In his view, allowing such taxes would disrupt this balance and give undue power to the central government at expense of states' rights.