Knowledgebase
How to manage the system tax settings in Magento
In addition to setting up tax rates and rules from Sales>Tax in the admin panel of Magento there are also some system configuration settings related to tax. To configure them go to System>Configuration>Tax button in the Sales section on the left. This will display on the right several panels with settings.
The Tax Classes panel has an option from which you can enable a product tax class for shipping in case you want to tax shipping. The tax class has to be include in a tax rule(s) in order for shipping to be taxed.
The Calculation Settings panel has various options which you can use to configure how tax is calculated. For example, from the Tax Calculation Method Based On option you can select whether tax should be calculated based on the total price of the order, based on the price of each unit or based on the row total. From the Tax Calculation Based On option you can select whether tax should be based on the billing or shipping address of the customer or on the shipping origin. From the Catalog Prices and Shipping Prices options you can select respectively whether the product and shipping prices that you specify in the admin panel include or exclude tax. From the option Apply Customer Tax you can also select whether discounts should be applied before or after taxation and from the option Apply Discount On Prices you can choose whether discounts should be calculated using the original base price or the price that includes the tax.
From the settings in the panel Default Tax Calculation Destination you can select the country and state/province which will be used to calculate tax for guests and registered customers who haven't specified and address yet. The Price Display Settings panel contains options from which you can select whether the catalog and shipping prices on the frontend should be displayed with tax included or excluded. You can use the settings in the Shopping Cart Display Settings panel to manage the way prices and taxes are displayed on the cart page on the frontend and at the Order Review step of the checkout process. The same settings are available in the panel Orders, Invoices, Credit Memos Display Settings but this time they affect the price and tax display settings in the order information of each order, invoices and credit memos. This includes the admin panel and the accounts of customers, as well as information that's sent to the email addresses of customers.
In case you want to enable fixed product taxes you can do that from the Enable FPT option that's in the Fixed Product Taxes panel. The panel also contains settings for managing the price display when fixed product taxes are enabled. In order to be able to add a fixed product tax to a product you need to create an attribute with the Catalog Input Type for Store Owner option set to Fixed Product Tax. You need to add the attribute to an attribute set which then you can use when adding products.
For more details and screenshots read the tutorial on how to set up and manage the system tax options in Magento.