We have only rudimentary tax calculation support currently and the internal tax calculations can only be used with direct card processing such as Authorize.NET where the customer address is captured directly on our site and tax is calculated before submitting for payment.

Currently in the US for online orders we only have to collect tax if the customer is also in our state where we operate a business. For example because I operate my business in North Carolina, if I get an order form someone living in my state I have to collect the correct tax for the county where I operate.

With PayPal or Google Checkout we do not know the customer address in advance so we cannot determine ahead of time if tax must be collected. In that case we must configure tax rates at PayPal and Google Checkout. ie I configure my local tax rate in my account at these providers and if I get an order from my state they will collect the tax then it is up to me to report it to the state and send in the taxes.

If an out of state customer makes an order we do not have to collect tax but technically the tax is still due and the customer should pay it to his own state (though in practice I think nobody does).

There is movement afoot to change this and make us collect tax for all jurisdictions however if that becomes a legal requirement it will be very difficult for small business to comply given that tax rates vary so much and vary by county and city even. It will become a huge expensive burden to comply collect and report taxes in so many jurisdictions.