An explanation of each taxing mode:

Item Tax is calculated on each item on a check.  If multiple of an item is rung in on the same line, the tax is calculated as a multiple of an individual item's tax.

Line Tax is calculated on each line on a check.  If multiple of an item is rung in on the same line, the tax is calculated off the total of that line.

Guest Tax is calculated on each guest's total due.

Check Tax is calculated on the entire check's total due.

So which to use?  In a bar by item or line is probably best.  For restaurants by guest is probably best.  For all sites what their state's taxing authority wants is probably best.