Vertex not exempting tax for non-stock items


We are on XE and using Vertex. We are using SRP8 as the product code and have setup Items with SRP8 = EXEMPT in the item master. Also P7307 has been setup with Order type (SM), Line Type (M) and product code EXEMPT. When the SM order is entered and sales invoiced the tax is exempted correctly however when we run sales update program the AR entry gets applied with tax. This issue does not occur for Order Type (SO) line type (D). Vertex say there is no issue from their end. The setups have been verified and are all good. We need to find out a solution within JDE without modifying Sales Update program. Is there a way to resolve this issue ?

Any inputs are appreciated.