Tax Rates

Go to the System → Localization → Tax rates

Tax Rates can be added only within some Tax Class. 

When specifying the tax rate, you will see the following screen

Locationselect specific Location (New Location can be added in the System → Localization  Locations)
Location's zoneIf 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)
DescriptionDescription of the Tax Rate. You can define this as anything you like.
Tax RateTax 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 ConditionApply this tax only if, a taxed amount (product, shipping, subtotal, etc.) corresponds to the condition.
Exempt GroupsSelect Customer's Groups to exempt this rate.
PrioritySet the priority of the tax rate. This will determine which tax rate will be used if tax rate location overlaps other.

Test Taxes

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.