Tax Rates can be added only within some Tax Class.
When specifying the tax rate, you will see the following screen
select specific Location (New Location can be added in the System → Localization →Locations)
If this rate will only apply to a specific state (or other Location's Zone designation) uncheck 'all location zones' and then locate the state (or Location Zone). (New Zones can be added in the System → Localization → Zones)
Description of the Tax Rate. You can define this as anything you like.
Tax rate can be set to either PERCENTAGE or ABSOLUTE AMOUNT in store's default currency. You can designate this under the drop-down menu.
Tax Apply Condition
Apply this tax only if, a taxed amount (product, shipping, subtotal, etc.) corresponds to the condition.
Set the priority of the tax rate. This will determine which tax rate will be used if tax rate location overlaps other.
Be sure to make test purchases with a fake customer account from each Location to be sure tax is set up correctly! Add a product to cart, and try to change the delivery address to a different state or country.