I'm not exactly sure how to do it. I was able to make tax exempt work for one of my buttons but it took me a while and I don't completly understand it since I don't know much about programming. The website that explains it is: http://checkout.google.com/support/sell/bin/answer.py?answer=74284.
After reading that and a some other google help stuff this is the code I came up with for the current button I am using on my website which seems to work:
<form action="https://checkout.google.com/api/checkout/v2/checkoutForm/Merchant/165655110857722" id="BB_BuyButtonForm" method="post" name="BB_BuyButtonForm" target="_top">
<input name="item_name_1" type="hidden" value="Gus Macker Team Shirts"/>
<input name="item_description_1" type="hidden" value=""/>
<input name="item_quantity_1" type="hidden" value="1"/>
<input name="item_price_1" type="hidden" value="50.0"/>
<input name="item_currency_1" type="hidden" value="USD"/>
<input name="_charset_" type="hidden" value="utf-8"/>
<input type="hidden" name="shopping-cart.items.item-1.tax-table-selector" value="tax_exempt"/>
<input alt="" src="https://checkout.google.com/buttons/buy.gif?merchant_id=165655110857722&w=117&h=48&style=trans&variant=text&loc=en_US" type="image"/>
The way I am using this now is I have a jotform where product information gets filled out and then when submitting the form it takes the user to a page with this checkout button to complete the transaction. I would like to skip the extra step and have the submit button take them right to google checkout but need to have this functunality. If you want to see how I'm currently using this visit http://www.jamestownrubberstamp.com/shop/gusmackershirts.html.
I'd like to start adding other similar forms like this to my website but some will be taxed and others won't. I am also considering getting authorize.net so I'm not sure how that all works.