Utilities>Set Up>Stores>Edit 
The drop-downs located in this dialog controls what the sales tax percentage is applied to on the quote, order or invoice.
The descriptions of "Material" and "Labor" here refer to Product Codes. Typically, Product Codes 01-79 are related to material and 80-98 refer to labor/installation. The product code range can be changed.
"Misc Charges" are located on the main Order Entry screen and are not tied to Product Codes and therefore must be accounted for separately in the taxing scheme.
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