When setting up taxes, the first step you need to take is to define the type of tax your business requires. You will do that by going to:
Administration > Localization
In the 'Tax system' field you will be able to choose 'Sales tax' or 'Value added tax' from the drop-down menu.
The system will log you out and you need to log back in, in order to see the changes.
Once you have done that, the next thing to do is to customize taxes by going to
Sales > Taxes
If your tax system is 'sales tax', the system will offer you a list of tax locations and tax jurisdictions. If needed, you can easily add additional ones, using the 'Add new' option.
Also, you will have two predefined tax categories, the default one applicable on the products from your inventory, and 'services', to be applied on the services your business offers. Here you also have an option to add additional categories.
If your tax system is 'VAT', the offered predefined tax location will be domestic trade and export, and the tax jurisdiction will have listed the standard rate and lower rate.
The tax category line will remain the same. For each of the lines, you will have the 'Add new' option at your disposal.
The appropriate tax locations and tax jurisdictions you will be able to select from the drop down may for each customer/supplier once you start creating them.
You will have the same option for the tax category for the products and services.