Didn't you modify Squash Taxes to include state tax? Maybe check that logic or even uninstall Squash Taxes.
Possibly useful data point: I have ZC 2.1.0 + Latest Local Sales Tax, my LST rates *do* include State tax, but I have another state which is also taxed that does not use LST. Ordering with delivery to that state works as expected, with the native Zen Cart sales tax being applied properly.
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