Composite Item with Parts and Labor

Is there a way to set up a composite inventory item that has labor and parts built as a kit and only charge tax on the parts that were in the kit?

Once a kit or composite item is created, it is a separate, stand-alone entity from its subcomponent pieces. Therefore the subcomponent pieces can't be taxed differently since only the completed item can be taxed as a whole. The final composite item can be either fully taxable or non-taxable.

One way you could approach this situation to have labor added as a non-taxable component for a line item is to create an Item Option Group (Admin -> Inventory -> Item Option Groups) and assign the Option Group to the main purchasable item (General -> Additional -> Item Option Groups when editing items). When creating options you can check a box to state whether the option is Taxable. You can then add the main item to an order, and the labor portion can be pulled in as an option and can be non-taxable.