Set up Item Tax Categories if required. 

To support situations in which items are taxable in one state and not in another, the system supports an Item Tax Category.  The tax category code can be used to identify and properly handle items which are taxable in one location and not in another (based on the item type).  Exception tables can be tied to the tax category codes to allow the system to handle the taxation for these items based on the rules in the state you are shipping to instead of based on the flag in the Inventory Master (see above).  For example, if you had a service item such as labor that is nontaxable in 46 of 50 states, you could properly handle it as follows.