This is a post from Bogleheads.org that mirrors the position my tax advisor gave me when reviewing my TT returns:
OID from a government entity is treated as tax-exempt interest for federal tax purposes. Market discount interest is not. The position of the Treasury is that OID is (equivalent to) interest paid directly to the government entity, whereas the market discount is NOT paid to the government entity, but to the after-market seller of the bond.
Although I haven't been able to locate any specific references, I'm certain that the state tax authorities will take the identical position in respect to U.S. treasury bonds, i.e. OID is tax-exempt, market-discount is not.
