To give a client tax exempt status, go to Manage --> User Accounts and search for the user that you wish to give tax exempt status to.
Click the down arrow next to the Show User button, then select Edit User.
Scroll to the bottom of the user's profile and set the radio button to Yes under the question "Is this user tax exempt?".
If a user has any open proposals or bookings when you change their tax status, you will need to re-create those bookings, as the change will not be retroactive.