Why are State, City and Postal greyed out when I add a tax rate?

The location boxes unlock one after another. Each level only opens once the level above it is set to a specific place:

1. Choose a Country. State unlocks.
2. Choose a State. City unlocks.
3. Choose a City. Postal unlocks.

Leave a level as *All () to cover everything at that level. Changing a higher level resets the levels below it to All ()*.

Then enter the Rate (required) and a Name, and click Add rate. A rate with all four levels left as *All () is your store-wide default and is marked Default** in the list.