Go to the "System Settings → Zones" page. Press the "New Zone" button.
Change the name of the created destination zone. Then click on the "Add state..." button and add the necessary state (i.e. "United States: California") state. Save the changes.
Go to the "System Settings → Taxes" page.
Press the "New Tax" button.
Enter your tax name and define the other settings
Click on the "New Rate" button. Select the zone created earlier and enter the tax rate(for example 5%). Save the changes.
If you have many destination zones, repeat step #7 for each of them.
Two more hints:
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 tax rate for this zone.
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 particular state(s), then add a rate for "USA" at the bottom of the list. In this case, USA rate will be applied to all states except the states configured explicitly.
There is also a pre-defined zone named "Other zones" that defines tax for locations matching no zone mentioned in the rate list.
Most likely your "Zone defines by" tax option is set to "Billing address".
Unfortunately, PayPal does not return customer's billing state code, only the country code. That is why we were unable to 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.
I cannot turn off tax for a product
Most likely you have the "Enabled for all products" tax option enabled.
How to remove the "This price includes taxes" text from product details
If you have the "Include tax in product prices" option enabled, but don't want to show the "This price includes taxes" text in product details, just disable the "Show included taxes on product details page" option on the "System Settings → Taxes" page.
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