Yes, Custom Pricing does create additional variants for tax-exempt customers when using the Variant method. It's important to note that if you don’t discount the product the customer will still be exempt from taxes at checkout. The Draft Order method does not involve the use of variants.
By default, the Draft Orders method is supplied on new installs of Custom Pricing, for detailed information on the different methods, visit Discount Methods in Custom Pricing. To switch, visit Switch Discount Methods in Custom Pricing.