Sales Tax Codes determine whether or not the Sales Tax Item should be calculated.
The codes answers the yes-or-no question whether or not Sales Tax applies on a sale. The simplest of setups would perhaps only include two: one for tax (TAX) and one for non-tax (NON).
At some point, however, you may be audited by state Sales Tax officials who will want to know why tax was not charged on any given transaction. This is why it can be important to setup more than one non- taxable item, each one indicating why tax was not charged.
A non-tax code of “EXT” (exempt) might be set up to indicate tax was not charged because the Customer was a church or a non-tax code might be “LBR” to indicate tax was not charged on a particular line item because it was labor (a common scenario in many states).