Use this procedure to set up item tax types and their tax exemption status.
Enter a description, and select the Tax check box if you want items with this tax type to be taxed.
Some states require that you indicate why something is tax exempt, and this is where you would enter those different tax-exempt reasons. For example, in California milk is tax exempt. In this case, set up a Milk tax type and clear the Tax check box. Then, when you sell milk, you select the correct item tax type. A Labor or Service item can also be exempt.
Typically, you will only set up Regular and Exempt tax types. For the Regular tax type, select the Tax check box; for the Exempt tax type, clear the Tax check box.