Depending on where the store is located, different tax laws apply to the sale of items and services. Even across county lines the taxes may be different and must be taken into account.
The Tax settings page allows for tax rates to apply to an area as specific as a postal code, or as broad as an entire country. Each tax rate that applies to an order's delivery address is applied separately, so the more specific areas should not take into account the taxes of the areas that contain them. Clear as mud? Good!
Postal code ranges may be used for slightly larger areas. These are specified by a * wildcard placed at the end of a partial postal code. For example "402*" will match any postal code that starts with "402". All matching tax rules are applied to an order, so be sure that some areas are not taxed more times than they are supposed to be.
Adding tax rules involves filling out a multi-step form. Tax rules have labels that are displayed in an order's line items, a type of area that they apply to (postal code, zone, or country), the specific area, a rate, and other special conditions. So far, these conditions include which line items the tax applies to, and whether the tax applies to the total after other taxes are applied. Because taxes can be cumulative, tax rules are weighted to ensure they are applied in the proper order. Setting the cumulative flag overrides the taxed line items settings since the entire total of the order by that point is taxed no matter how that total is calculated.