Regions

The Countries menu is where you can select the countries that you will do business with.  For each country, you can also define specific states/provinces.  These will appear as acceptable address locations when the customer uses the address book or checks out.  

You can even further define a region by using Zones.  This feature allows you to breakdown the basic country definition and specify regions based on postal codes.

The regions you create are used for the calculation of taxes and shipping.  They should be setup before you create your shipping and tax rules.