Address Billing or Shipping. You can select whether Billing Address or Shipping Address gets preference by changing the 'Determine Address Tax Category From' option in Accounts Settings. Tax Category is determined from Party Address first. If the Address is not assigned any Tax Category, then the Party's Tax Category is used.
5. You can also manually select the Tax Category in a transaction.
4. What effect does the Tax Category have in a transaction?
Specific Item Tax Templates for that Tax Category are automatically set for items.
You can create Tax Rules to automatically set a specific Sales / Purchase Taxes and Charges Template based on different Tax Categories in transactions.