You need to be very explicit, then, about things. Per this, if you do $500 of remote control programming and find that you need to add an IR emitter, your $500 of programming becomes taxable. If you just give the emitter to the customer, you're not collecting or paying sales tax on it, and that's illegal. If you claim it under use tax, which is intended to collect tax on things you buy for retail but use yourself, that's fraud. I'm glad California separates labor from parts for taxing, and this is a clear example of why it's a good thing to do.

Bill, you bring up an interesting thing.

As I read this, the customer is being charged by the contractor for 10% of the stuff you supplied, but also 10% of the tax he has paid to you. I'm sure this is a detail that was not discussed because it was not noticed or not known when the customer and contractor made their agreement. And at first, I thought it was an issue. It's not -- the cost would be the same to the customer either way it was handled.

In California, and I presume many places, your invoices could and maybe should be different: they should be written to the contractor as resale, with no charge for tax; the contractor then adds his 10% and charges tax on the whole bundle. I say this because you stated that you work for the contractor, and because in CA, if parts are involved, tax must be collected on them. (A negative here in CA is that if you buy parts and then don't charge for them in an itemized manner [7 screws, drywall, 8x2"], then you have to pay sales tax for them when you purchase them!

Guessing at the tax rate, if your invoice was $100 plus 8% tax, you'd now charge the customer $108 and the contractor would charge $10.80, a total to the customer of $118.80. If you invoice the contractor for $100, he adds his 10%, bringing it to $110, then adds 8% tax, which is $8.80 for a total of $118.80. It's the same amount, but the customer now cannot say that the contractor charged him a percentage of the tax and that he was therefore taxed twice.

I can see the customer arguing that the contractor's 10% should be on the amount you charge before tax, and writing it up the second way stops that argument.

Also, all the rules I've read about here for Florida clearly imply that the contractor should be charging tax on his 10%, whether because everything gets taxed or because materials were used on the job, and you haven't said he's charging 10%. You guys really need to consult the taxing authority to get this worked out.