diff --git a/commerce_discount.module b/commerce_discount.module
index 127ab02..d3b7a97 100644
--- a/commerce_discount.module
+++ b/commerce_discount.module
@@ -28,7 +28,7 @@ function commerce_discount_commerce_cart_order_refresh(EntityDrupalWrapper $orde
   commerce_discount_remove_discount_components($order_wrapper->commerce_order_total);
 
   foreach ($order_wrapper->commerce_line_items as $delta => $wrapper_line_item) {
-    if ($wrapper_line_item->getBundle() == 'product_discount') {
+    if (in_array($wrapper_line_item->getBundle(), array('product_discount', 'commerce_discount'))) {
       // Delete the line item, and remove it from the order.
       $line_items_to_delete[] = $wrapper_line_item->line_item_id->value();
       $order_wrapper->commerce_line_items->offsetUnset($delta);
diff --git a/commerce_discount.rules.inc b/commerce_discount.rules.inc
index 1e0bee5..42e255d 100644
--- a/commerce_discount.rules.inc
+++ b/commerce_discount.rules.inc
@@ -420,6 +420,12 @@ function commerce_discount_rules_event_info() {
     'access callback' => 'commerce_order_rules_access',
   );
 
+  $items['commerce_discount_order_discount_line_item'] = array(
+    'label' => t('Adding or updating an order discount line item'),
+    'group' => t('Commerce Discount'),
+    'variables' => entity_rules_events_variables('commerce_line_item', t('Line item'), array(), array('context' => 'a drupal commerce line item')),
+  );
+
   return $items;
 }
 
@@ -1366,6 +1372,8 @@ function commerce_discount_add_line_item(EntityDrupalWrapper $order_wrapper, $di
   // Add the discount price component.
   commerce_discount_add_price_component($discount_line_item_wrapper, $discount_name, $discount_amount);
 
+  rules_invoke_event('commerce_discount_order_discount_line_item', $discount_line_item);
+
   // Save the incoming line item now so we get its ID.
   commerce_line_item_save($discount_line_item);
   // Add it to the order's line item reference value.
@@ -1524,6 +1532,7 @@ function commerce_discount_set_existing_line_item_price(EntityDrupalWrapper $ord
       $line_item = $line_item_wrapper->value();
       if (isset($line_item->data['discount_name']) && $line_item->data['discount_name'] == $discount_name) {
         commerce_discount_set_price_component($line_item_wrapper, $discount_name, $discount_price);
+        rules_invoke_event('commerce_discount_order_discount_line_item', $line_item);
         $line_item_wrapper->save();
         $modified_existing = TRUE;
       }
diff --git a/commerce_discount.rules_defaults.inc b/commerce_discount.rules_defaults.inc
index 3d21d7c..6950464 100644
--- a/commerce_discount.rules_defaults.inc
+++ b/commerce_discount.rules_defaults.inc
@@ -83,5 +83,31 @@ function commerce_discount_default_rules_configuration() {
     }
   }
 
+  if (module_exists('commerce_tax')) {
+    $rule = rules_reaction_rule();
+
+    $rule->event('commerce_discount_order_discount_line_item');
+
+    $rule->label = t('Calculate taxes on order discounts');
+    $rule->active = 1;
+    $rule->weight = 10;
+    $rule->tags = array('Commerce Discount');
+
+    $rule->condition('data_is', array(
+      'data:select' => 'commerce-line-item:type',
+      'op' => '==',
+      'value' => 'commerce_discount',
+    ));
+
+    foreach (commerce_tax_types() as $tax_type_name => $tax_type) {
+      $rule->action('commerce_tax_calculate_by_type', array(
+        'commerce_line_item:select' => 'commerce-line-item',
+        'tax_type_name' => $tax_type_name,
+      ));
+    }
+
+    $rules['commerce_discount_calculate_taxes_on_order_discounts'] = $rule;
+  }
+
   return $rules;
 }
diff --git a/tests/commerce_discount.test b/tests/commerce_discount.test
index 5159429..ab1c262 100644
--- a/tests/commerce_discount.test
+++ b/tests/commerce_discount.test
@@ -114,6 +114,53 @@ class CommerceDiscountTest extends CommerceDiscountTestBase {
   }
 
   /**
+   * Test fixed order discounts with taxes.
+   */
+  public function testCommerceDiscountFixedOrderDiscountAndTaxes() {
+    module_enable(array('commerce_tax', 'commerce_tax_ui'));
+
+    // Set up a tax rate.
+    $tax_rate = commerce_tax_ui_tax_rate_new('sales_tax');
+    $tax_rate['name'] = 'sales_tax_test';
+    $tax_rate['title'] = 'Sales Tax Test';
+    $tax_rate['rate'] = 0.2;
+    commerce_tax_ui_tax_rate_save($tax_rate);
+    commerce_tax_rates_reset();
+
+    $discount = $this->createDiscount('order_discount', 'fixed_amount', 300);
+    $order = $this->createDummyOrder($this->store_customer->uid, array($this->product->product_id => 1), 'completed');
+    $order_wrapper = commerce_cart_order_refresh($order);
+
+    $discount_line_item_total = $order_wrapper->commerce_line_items->get(1)->commerce_total->value();
+
+    // Check if the discount line item has a tax component.
+    $this->assertTrue(isset($discount_line_item_total['data']['components'][2]), 'Discount line item has a tax component.');
+
+    // Check if the discount line item's tax component amount is correct.
+    $this->assertEqual($discount_line_item_total['data']['components'][2]['price']['amount'], 300 * $tax_rate['rate'] * -1, 'Discount line item has the correct tax amount.');
+
+    // Check that the order total is correct.
+    $this->assertEqual($order_wrapper->commerce_order_total->amount->value(), (1000 - 300) * (1 + $tax_rate['rate']), 'Commerce order total includes tax that is calculated post-discount.');
+
+    // Disable the discount.
+    $discount->status = FALSE;
+    entity_save('commerce_discount', $discount);
+
+    // Re-save the order.
+    $order_wrapper = entity_metadata_wrapper('commerce_order', $order);
+    $order_wrapper->save();
+
+    // Recalculate discounts.
+    $order_wrapper = commerce_cart_order_refresh($order);
+
+    // Make sure that the order line item was removed.
+    $this->assertFalse(isset($order->commerce_line_items[1]), 'The discount line item has been removed.');
+
+    // Check if the order total is still correct without the discount applied.
+    $this->assertTrue($order_wrapper->commerce_order_total->amount->value() == (1000 * (1 + $tax_rate['rate'])), "Fixed order discount is removed when it's not applicable and the correct tax is applied.");
+  }
+
+  /**
    * Test percentage order discounts.
    */
   public function testCommerceDiscountPercentageOrderDiscount() {