Basic Terms and Definitions
Tax Regions - A designated area that a specific tax rate can be applied. This is able to be broken down by country, state or zip code.
Tax Rates - The percentage in tax that will be charged to an area.
Priority - A setting on the tax regions, that will further determine what region an order falls into. This is needed in situations where an order will fall into multiple tax regions. The order will fall into the region that has a higher priority.
Tax Region Setup
Before applying the tax rates, the tax region needs to be defined. To begin, log into the admin panel. After logging in, go to Settings > Payments and Taxes > Tax Regions. Once here, click the New button in the top right to begin creating a new region.
Once here, name the region after the location the region falls under. If the plan is to separate this by country, change the Region Type to "country". Otherwise"zip code" is the correct setting if you're trying to break it down by state or zip code.
Now this is set, there will be a list of all the viable countries or states. Simply highlight the area you would like to add to this tax region. If you need to select multiple, hold down the CTRL key (command key if you're on OSX) and click each area.
If its being broken down by zip code, select the state the zip code falls into. Then enter each zip code you would like to fall into this tax region.
Tax Rate Setup
Now that the region is setup, lets add in a the actual amount to tax. In the admin panel, go to Settings > Payments and Taxes > Tax Rates and create a New tax rate.
Here you can name the tax rate, and choose whether or not you would like to tax the shipping and handling. Simply choose the region, and specify the amount this area will be taxed.