What does tax/calculation/shipping_includes_tax mean?

Question

In Mage_Tax_Model_Config I see this line:

const CONFIG_XML_PATH_SHIPPING_INCLUDES_TAX = 'tax/calculation/shipping_includes_tax';

We use Magento 1.4x.

I have searched for documentation on this but can't find any specifically and wonder if this means:

1. "The shipping price already includes tax, so don't add tax to it" (my guess), or
2. "We need to include tax on shipping as well?" (i.e. if shipping is $50 and tax is 10%, add $5.00 to the order for the shipping portion).

Which is the correct answer? Thanks

Answer 1

This constant contains a configuration path. The setting can be found in Magento's backend configuration via System > Configuration > Sales > Tax. Then there should be a tab called "Calculation Settings". Within that tab, there should be a field with the label "Shipping Prices". Here you can set if the shipping prices you entered within Magento are the shipping prices including tax or excluding tax.

Based on this setting, Magento will add tax to the shipping price (if set to "Excluding tax").