A federal system of government works by dividing the powers between two levels of government. Powers are assigned on the national level, but states also have specific powers.
Typically the federal government deals with issues that affect the nation as a whole, including foreign policies, imposing import/export taxes and declaring war. The states have more power over domestic issues, such as specific state laws and regulations. Though the states hold this power, they have to ensure their powers do not step outside the boundaries set by the United States Constitution. When conflict between state and federal powers arise, the U.S. Supreme Court weighs in.