Create a new "Customer Tax Class"
Click "Add New"
Create a new Customer Group
We will now see our new "Tax Exempt" Group
Next we can take a look at the "Tax Rules" that are setup:
We will notice that the Tax Rule only applies to Customer Tax Class "Retail Customer"
Now we can assign customers to our new "Tax Exempt" group
Once this setup has been completed run a test transaction for this customer to ensure that they are NOT charged tax when shipping to a state that you would normally be charging tax for.