1) Is it required to set aside if using FAR Part 8? Does Part 19 trump Part 8?
2) What is the fundamental difference between commercial item and COTS item?
1) You correctly note that FAR 19.501(c) "states the KO shall review acquisitions to determine if they can be set aside for small business," and equally correct that "FAR 8.404 states Part 19 does not apply to FSS" (except if the requirement is bundled). So, there is no contradiction (your words "on the contrary"). I can see nothing in FAR 19.501(c) that contradicts FAR 8.404, because FAR Part 8.404 states up front that Part 19 does not apply to orders off of the Federal Supply Schedule. Perhaps the confusion stems from FAR 8.405-5, which discusses a preference for selecting small businesses among FSS holders. However, FAR 8.405-5 uses the term "should" instead of "shall." Much of FAR Part 19 is based on "shall," which does not allow for contracting officer discretion.
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2) A commercial item can be defined in any one of eight ways, as is done in FAR Part 2. A COTS item (also defined in FAR Part 2) has a much narrower definition, and cannot be physically modified and still be considered a COTS item. COTS items are exempt from certain procurement laws from which commercial items are not exempt. See FAR 12.505.