If the FAR states that micropurchase limits are different for hardware and service, how can a charge that falls within the limits be denied because of the 51% rule? For example, a program conducts market research to replace a faulty system and the best value for the government comes in at $3,600 total. The KO selects a vendor and proceeds with the work. When a GPC is used for payment, the charge is denied because the lawyers state that the vendor's line items include too much service ($2,300). Furthermore, the lawyer states that he considers the entire bill to be service due to the fact that 51% of the bill is service-related. If the charge falls within the FAR limits, how can they deem the entire bill to be service and nullified?
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First, this is a great question. Second, never a good idea to argue with lawyers.
I'm going to caveat this answer with one assumption and that is that there was only one contractual action (see FAR 2.101 definition for contract) and it included both services and hardware/products.
In that case your lawyer and the office who runs your GPC program are correct. See FAR subpart 22.10 Service Contract Labor Standards and FAR 22.1002-1. The FAR and the Statute say it applies to contracts in excess of $2,500 (bold italics added for emphasis). It does not say only to the services portion of the contract.
Note there are additional references in FAR subpart 22.10 which states "contract in excess of..." again, bold italics added for emphasis.