If we tell it N, then we get that same message.   It will allow you to continue, the only problem is that that sale does not come out on AR-K.     If your state doesn't require you to account for every sale then that should be okay.  
 
I have set up several   NONTAXABLE  codes such as  RESALE, LABOR ONLY, INTERSTATE COMMERCE, DIRECT PAY PERMIT   and use them at SO entry.  This makes sure that every sale is accounted for in AR-K
 
While our Revenue dept has reduced its paperwork and ease of forms by allowing us to report one collective nontaxable figure, if we get audited we still have to explain the reason  a sale was not taxable