When a purchase is made the taxation direction defines which jurisdictions tax rule to apply.  It can be either the source ( your business location ) or the destination ( the customers location ).  
                
For example, Most states and Washington, D.C., are destination-based. There are 11 source based states. Arizona, Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah, Virginia and California
                    
California is a unique case. Its considered a mixed direction state as city, county and state sales taxes are source based a while district sales taxes and supplementary local taxes are destination based.

Note: Currently, the billing plugin taxation table doesn't support this special cases.

Compound taxation is a tax which is applied optop of another tax.  In otherwords, the tax is calculated on the amount after the primary tax has been applied ( not the untaxed amount ).  
                
When creating rates, it's not always necessary to declare the definition as being a compound tax, an adjusted tax percentage can be used instead yeilding the same result.
                
For example, in Canada, Quebecs' QST is a compound tax.  Taxes are applied at a fixed rate so it is possible to define the following for Quebec: GST = 5%, QST = 8.925% ( instead of 8.5% ). This is because ( 100% + 5% ) * 8.5% = 8.925%. The total effective tax will be 13.925% as the PST includes the GST amount.

Some jurisdictions require that freight be taxed and it depends on the tax-ability of the products being shipped.  You can define a taxation rules with the option to tax the freight or tax freight as a percentage of taxable items.  This means that freight is taxable when all products being shipped are taxable or as a percentage if some products are taxable.
                
If the shipment contains both exemptions and taxable products, the portion of the charge allocated to the taxable sale is taxable, and the portion attributed to the exemption sale is exempt.
                             
Note: There are exceptions to every rule and some states have different rules for different situations. The billing plugin taxation table doesn't support these special cases.

To create a tax exemption, a locality, condition and amount must be applied to the exemption. The conditions are either less than or greater than X amount.  This determines whether to apply the rule.

For example, in New York, clothing items priced at $110 or less are not taxable.  

To create a tax reductions, a locality and reduced percentage must be applied to the reduction. This determines whether to apply the rule.

                
For example, in Illinois, groceries are taxable at a reduced rate of one percent.