You want to know how to exempt customers from sales tax in Magento 1.
- Go to Sales > Tax > Customer Tax Class > Add New
- For Avatax Code, look at the chart below and enter the letter code that describes the type of exemption > Save Class
- In the Class Name field, enter a value such as Exempt – Federal Government
- Go to Customers > Manage Customers
- Select a Customer > Account Information
- Select the appropriate Customer Group and click Save
For more information, review the Magento 1 user guide.