I'm creating a bill, entering COGS under the expense tab and marking it as a billable expense. I then create an invoice and add the expense with markup. The billable expense offsets the COGS account but the markup goes to the income account.

We deal with two main taxes-GST and PST. GST is a VAT and QuickBooks calculates this correctly. PST is a cascading tax and we need to include the PST we paid for materials when we charge the customer. We are not charging PST on our services-our services are exempt from this tax-however we do need to include PST in the COGS as it's part of the cost to us. If I use expenses then QuickBooks adds the cost including PST to the invoice. If I use items then QB adds the cost net PST. 

Does that make sense?