Understanding tax rules
Sales tax is a complex subject. Taxes in your store are controlled by "Tax rates" (or tax rules). There are several important variables that define a tax rate applied.
Product tax class
A product tax class is an identifier that is assigned to a product. This defines the tax class for a product. In most cases, you want to use the default “Taxable Goods” class. If you sell goods that require a different tax class you can add the classes in System → Localization → Tax Classes. For example, a product tax class can be "Taxable Goods" or "None (Tax-free)".
Tax rate assigned to tax class
A tax rate is a number in percentage or absolute fixed amount, with which taxes are calculated. For example, we can set a tax rate to 8.25% for the sales tax of California. Tax Rates control which taxes are applied to specific geographic areas (Locations).
Location and Location's Zone
If you want to apply specific Tax to specific State, Territories, Province you need to create Tax Rate and assign it to this State or in other words to Location's Zone.
Taxes can be applied both to shipping methods and store products.
According to your country's laws, you may need to charge different taxes for different types of products. For instance, you may need to calculate sales tax differently for alcohol and non-alcohol products. By using Tax Classes you can organize your products into groups according to what sales tax rate calculation rules need to be used for them.