As a merchant, you might need to charge taxes on your sales (sales taxes in the US, VAT in Europe and Japan, GST in Canada, etc), and then report and remit those taxes to your government. Check with your local tax experts whether you sell taxable products and what are the tax rates associated with them before moving forward with online sales.

There are two ways to set up taxes in your store:

For users from the US, Canada, Australia, and Europe tax rates are calculated automatically based on the store and customer's location. While checkout, the customer will be charged a proper tax rate according to country and regional tax rules.
Tax laws are constantly changing. Country, state, or even city government may apply new tax rates that a business owner is expected to keep up with. Your online store will stay up to date on the tax law.

To enable automatic taxes:

That's it!

Once enabled, the automatic tax rate will determine a precise tax rate at checkout depending on where you and your customers are located. The tool knows the tax rules in your country, state, and even county and city and applies them properly to each order:

The tax rate is calculated with a zip code accuracy. If your customer provides zip+4, it will be calculated with even higher precision. In some states (and the number of such states is growing), the tax is calculated with a street address level precision.

You can manually configure your store to calculate tax rates for different regions, zones, countries.

To set up taxes manually (for example, let’s say you need to create a 7.5% tax for California):

If you have many destination zones, repeat the steps above for each of them.

If you want to set up the same rate for several different states, you can create a zone consisting of these states and set up a tax rate for this zone.

There is also a pre-defined zone named "Other zones" that defines tax for locations matching no zone mentioned in the rate list.

Some customers, like wholesalers and nonprofit organizations, can be exempt from taxes. You can mark such buyers as non-taxable, so they can check out in your store without having tax applied to their order. In order to exempt a customer from paying taxes in your store, you should mark them as non-taxable in your store admin.

To mark customers as tax-exempt:

3. Enable tax-exempt.

4. Save the changes.

That’s it. Now the customer is marked as tax-exempt and they won’t pay any taxes while buying products in your store. You can always check this status in the Tax-exempt column at the Customers page.

Automatic tax rates apply to all products by default. In case you do not charge tax for some of your products, or you need multiple taxes, you will need to use manual tax setup.

Most likely your "Zone defines by" tax option is set to "Billing address". PayPal does not return the customer's billing state code, only the country code. That is why your store cannot calculate the tax if it's based on the billing address. Please change the "Zone defines by" option to "Shipping address", it will fix the issue.

If you want to add tax percentage to your invoices, you can add it to the name of your tax here: store admin → Settings → Taxes page. For example, if you have a 10% tax, in your invoices it may look like this: 10% Tax: $1,5. A new tax name will be applied only to orders placed after editing.

EU countries like Germany and Italy have certain regulations that impose rules on businesses and require a specific display of product prices and sales taxes. Please refer to this article for detailed information: EU taxes (VAT).

The tax calculation algorithm determines which tax to apply by looking through the configured tax rate list, top-down. When it finds a matching zone, it stops and applies the corresponding tax rate. So you can define tax rate for a particular state(s) or cities (using zip codes), then add a rate for "USA" at the bottom of the list. In this case, the USA rate will be applied to all states except the states configured explicitly.

In order to get a 0% tax rate, non-taxable buyers have to sign in at checkout before placing an order. Otherwise, the standard taxation rules configured in the store will be applied. Such customers should be advised to log in before purchase using the correct email. You as the store owner can check this email in your store admin → My Sales → Customers.