Sometimes designers want to charge tax on just the Cost (what the designer pays) of an Item and not include their markup in the tax calculation. This explanation will explain how to do this. 

What's taxed is always the entire Extended Client Price if it has ’tax’ for Tax Client, which will usually include the markup.

If you don’t want to tax the markup:

1) you’ll want to make the ‘Markup=0’ for the Item (so the Cost=Client Price).

2) then, in the Item Details of the Item add the Markup you want as a separate Component (create a SalesCode for something like ‘Markup Amount’ or ‘Margin’ or something like that) and put the Cost and Markup as 0 but put in the Client Price the exact amount you want the Margin to be. Then choose ‘non’ for the ‘Tax Client’ box so the margin is not taxed.

Unless done the above way the markup will be taxed if the overall Item is taxable. Think of it like buying something from a store- the store has a wholesale cost (like your ‘Cost’ in DL) for an item and they charge you a retail price when you buy the item. You pay tax on the final retail price, not just their wholesale cost. This is how the default in DL is set up and most designers use it this way.

However, if you need to not charge tax on just the markup itself use the above approach.