Tax rules in Magento are comprised of a Customer Tax Class, Product Tax Class and Tax Zone and Rate (for either where the buyers billing or shipping address is - typically this is shipping address).
The components of a Tax Rule are showing on the TAX or VAT screen, which is found in Magento admin by navigating to Sales > TAX (or VAT), and viewing the various screens within these sections.
Customer Tax Class
A customer tax class, quite like a customer group, is a way to identify the type of customer making the purchase, but this time for the purposes of distinction for tax purposes (e.g. retail, trade).
Product Tax Class
A product tax class is essentially the type of product that is being purchased for the purposes of tax. Some goods may classify as a zero-rated or taxable good, so it is important to understand what the appropriate tax classes are for your range of goods / services. The product tax class is assigned to the product itself, within the product configuration (and is a required field by default).
Tax Zones & Rates
Depending on the country, state or zip code that your customers reside, the tax rate will need to reflect that appropriate tax rate that exists in that area.
How to Configure Tax Rules
Once you have configured your customer tax class, product tax class and tax zones & Rates, configuring your tax rules is just a task of marrying up all the elements to create rules that will match all the tax scenarios that exist when a customer checks out.
1. Click 'Manage Tax Rules' (from the Sales > TAX or VAT menu), and then click 'Add New Tax Rule'.
2. Give your tax rule a name for easy identification and then select the appropriate combination of customer tax class, product tax class and tax rate that will make up your tax scenario (see example below for Retail Belgium Customers)