Working with a client whose project is federally funded. I charged tax to them on my first invoice, in which they explained to me that because the project is federally funded, they are tax exempt, and don't have to pay taxes on it. They said they could provide something in writing to my accountant at the end of the year explaining this. I asked them if, being under the umbrella of the project, I was exempt as well and they said yes. Does anyone know if this is so, or are the rules a little different because I'm a contractor?

The correct answer is: contact your accountant NOW and deal with this from your side so there is no surprise when it comes time to file and you are on the hook to remit federal taxes due to a "misunderstanding"

If the client is a commercial entity working for profit themselves, it is perhaps possible -- but doubtful -- that the client is entitled to exemption from state tax. Even when I've traveled for the government I had to present a form to the hotel to have the state taxes waived, and sometimes the hotels don't want to honor them and I (and thus the US government) end up paying state tax.

Shaun's advice is good, but at the very least they need to show you something official in writing, not just their opinion. Here's some info that probably isn't applicable in this situation, but just in case it is helpful to you for your own purchases...:

Texas Film Commission, Office of the Governor Rick Perry - Sales Tax Exemptions (http://governor.state.tx.us/film/incentives/sales_tax_exemptions/)

I don't know about Texas, but here in Minnesota, if they can't provide a tax-exempt certificate, they pay tax. It's really that easy.