How do you create a taxonomy for products?

I have the broader question, which is what is the definition of 'taxonomy'. What does it actually mean to create a taxonomy for something... Then I'd like to apply that to an example. Lets say the project is a redesign of an Ecommerce website selling books. You have been tasked with creating a taxonomy for products. What steps as UXer would you take need to take in order to achieve this?