Magento Open Source, 1.9.x
Product Tax Classes

Product tax classes can be created and assigned according to the tax requirements of the product. For example, food might not be taxed (or might be taxed at a different rate). If your store charges an additional tax on shipping, you should designate a separate product tax class for shipping.

Product Tax Classes

To define a product tax class:

1. On the Admin menu, select Sales > Tax > Product Tax Class.
2. In the upper-right corner, click the Add New button.

Product Tax Class Information
3. Enter a Class Name for this tax class.

The new tax class now appears as a Tax Class option for product prices.

4. When complete, click the Save Class button.