[No. 35613-9-II. Division Two. November 27, 2007.]
[6] Industrial Insurance — Assessments — Premiums — Prime Contractor Liability — Exception — Elements — Burden of Proof. RCW 51.12.070 imposes primary and direct liability for all industrial insurance premiums on a person, firm, or corporation that lets a contract to another to perform work; however, the statute contains an exception from liability for registered contractors if, inter alia, the delinquent subcontractor has a principal place of business that would be eligible for an Internal Revenue Service business deduction and the subcontractor maintains a separate set of books or records showing all business income and expenses. The burden of establishing the exception is on the contractor claiming the exception. [7] Statutes — Construction — Question of Law or Fact — Review — Standard of Review. The interpretation of a statute is a question of law that is reviewed de novo. [8] Statutes — Construction — Unambiguous Language — Plain Meaning — In General. When a statute's meaning is plain on its face, a court will give effect to that plain meaning as an expression of the legislature's intent without resorting to rules of statutory construction. [9] Statutes — Construction — Legislative Intent — Legislative History — Absence of Ambiguity. The use of legislative history as an aid in interpreting a statute is inappropriate if the statute is unambiguous. [10] Industrial Insurance — Assessments — Premiums — Prime Contractor Liability — Exception — Elements — Subcontractor Eligibility for Business Tax Deduction — Burden of Proof. Under RCW 51.12.070, a prime contractor seeking to avoid liability for a subcontractor's unpaid industrial insurance premiums is not required to show that the subcontractor has a principal place of business that is "in fact" eligible for an Internal Revenue Service business deduction; rather, the contractor is required to show only that the subcontractor "would be eligible" for the deduction. [11] Industrial Insurance — Assessments — Premiums — Prime Contractor Liability — Exception — Elements — Subcontractor Eligibility for Business Tax Deduction — Requirements. For purposes of RCW 51.12.070, under which a prime contractor may avoid liability for a subcontractor's unpaid industrial insurance premiums if the subcontractor has a principal place of business that would be eligible for an Internal Revenue Service business deduction, under 26 U.S.C. § 280A(a) eligibility for an Internal Revenue Service business deduction depends on whether the subcontractor maintains a principal place of business outside of the dwelling unit that the subcontractor uses as a residence or the subcontractor uses a portion of the dwelling unit exclusively as a principal place of business on a regular basis. [12] Industrial Insurance — Assessments — Premiums — Prime Contractor Liability — Purposes. RCW 51.12.070, which makes a prime contractor liable for a subcontractor's unpaid industrial insurance premiums, is intended to facilitate and broaden the collection powers of the Department of Labor and Industries. [13] Statutes — Validity — Wisdom of Legislation — In General. It is not for a court to question the wisdom of a statute, even if its results seem unduly harsh. [14] Industrial Insurance — Assessments — Premiums — Prime Contractor Liability — Exception — Elements — Separate Books and Records — All Items of Business Income and Expenses — Necessity. Under RCW 51.12.070(2), a prime contractor seeking to avoid liability for a subcontractor's unpaid industrial insurance premiums must show that the subcontractor maintains separate books and records that "in fact" reflect all items of business income and expenses. [15] Industrial Insurance — Assessments — Premiums — Prime Contractor Liability — Exception — Elements — Separate Books and Records — All Items of Business Income and Expenses — Proof — Sufficiency. For purposes of RCW 51.12.070(2), under which a prime contractor may avoid liability for a subcontractor's unpaid industrial insurance premiums if the subcontractor maintains separate books and records reflecting all items of business income and expenses, regular invoices and cancelled checks may not be sufficient, alone, to support a conclusion that all items of the subcontractor's business income and expenses are kept in separate books and records. [16] Industrial Insurance — Assessments — Premiums — Prime Contractor Liability — Successor Liability Statute — Effect. While RCW 51.16.200 provides for successor liability for industrial insurance premiums, nothing in the statute requires the Department of Labor and Industries to attempt to collect past due industrial insurance premiums from a subcontractor's successor before the department may assess the premiums against a prime contractor under RCW 51.12.070. [17] Industrial Insurance — Assessments — Premiums — Prime Contractor Liability — Collection Statute — Effect. While RCW 51.16.150 provides that the Department of Labor and Industries may initiate an action at law to collect sums due from a defaulting employer, nothing in the statute requires the department to attempt to collect past due industrial insurance premiums from a subcontractor before the department may assess the premiums against a prime contractor under RCW 51.12.070. Nature of Action: A general contractor sought judicial review of a Board of Industrial Insurance Appeals decision upholding an assessment of industrial insurance premiums that one of its subcontractors did not pay. Superior Court: The Superior Court for Thurston County, No. 06-2-00590-0, Wm. Thomas McPhee, J., on October 27, 2006, entered a judgment affirming the board's decision. Court of Appeals: Holding that the record did not support excepting the general contractor from prime contractor liability for the subcontractor's unpaid industrial insurance premiums and that the Department of Labor and Industries was not required to attempt to collect the premiums from the subcontractor's successor or to initiate a collection action against the subcontractor before assessing the premiums against the general contractor, the court affirms the judgment. Klaus O. Snyder- (of Snyder Law Firm, LLC), for appellant. Robert M. McKenna-, Attorney General, and James S. Johnson-, Assistant, for respondent. ¶1 ARMSTRONG, J. — Lee's Drywall Company, Inc., appeals a Board of Industrial Insurance Appeals (Board) order assessing Lee's for industrial insurance premiums that one of its subcontractors did not pay. Lee's argues that (1) the Board incorrectly interpreted and applied RCW 51.12.070, the prime contractor liability statute; (2) the Department of Labor and Industries (Department) failed to fulfill a statutory duty to collect the premiums from Lee's subcontractor before assessing them against Lee's; (3) the Department improperly implemented new rules without following required rule-making procedures; and (4) these rules unconstitutionally mandate private searches on behalf of the government and impair the contract between Lee's and its subcontractor. Finding no error, we affirm. FACTS ¶2 Lee's Drywall Company, Inc., is a general contractor that primarily works as a drywall subcontractor. In the second quarter of 2003, Lee's subcontracted with Zagy's Drywall to perform drywall work. Lee's obtained proof that Zagy's was licensed, bonded, and insured before subcontracting with the company. But Lee's did not determine whether Zagy's maintained either a principal place of business that would be eligible for a business deduction for Internal Revenue Service (IRS) tax purposes or a set of books or records that reflected all items of income and expenses of the business. ¶3 Zagy's submitted regular invoices to Lee's, and Lee's paid Zagy's by check. Jeffrey Lee, president of Lee's, testified that Zagy's was not housed within Lee's Sumner property and that he believed Zagy's did business out of the Federal Way address it registered with the Department. ¶4 Zagy's failed to pay the industrial insurance premiums for its employees during the second quarter of 2003. The Department audited Zagy's, but the auditor was unable to ascertain the amount of premiums Zagy's owed from the records Isaias Guerrero, Zagy's owner, provided. And because Guerrero did his books and records on his kitchen table, the auditor concluded that the location did not qualify for an IRS business deduction. ¶5 The Department assessed prime contractor liability under RCW 51.12.070 against Lee's to recover the unpaid premiums. After using subcontractor reports from Lee's to determine the amount of premiums Zagy's owed for the work it did for Lee's, the Department issued an order assessing Lee's for $7,937 of Zagy's unpaid premiums. ¶6 Lee's appealed the Department's assessment to the Board. The industrial appeals judge (IAJ) issued a proposed decision recommending that the Board affirm the Department's order. The IAJ found that there was insufficient evidence to establish that Zagy's maintained a principal place of business that would be eligible for an IRS business deduction or that Zagy's maintained a set of books and records that disclosed all business income and expenses. ¶7 The Board adopted the IAJ's decision, and the superior court affirmed the Board's decision. ¶8 The principal issue is whether the Board correctly interpreted RCW 51.12.070 to require Lee's to prove that Zagy's maintained a principal place of business that would be eligible for an IRS business deduction and that Zagy's maintained a set of books or records that disclosed all of its business income and expenses. ANALYSIS I. STANDARD OF REVIEW II. PRIME CONTRACTOR LIABILITY ¶11 Lee's contends that the Board incorrectly interpreted and applied RCW 51.12.070, the prime contractor liability statute. (1) The subcontractor is currently engaging in a business which is registered under chapter 18.27 RCW . . . ; (2) The subcontractor has a principal place of business which would be eligible for a business deduction for internal revenue service tax purposes other than that furnished by the contractor for which the business has contracted to furnish services; (3) The subcontractor maintains a separate set of books or records that reflect all items of income and expenses of the business; [and] (4) The subcontractor has contracted to perform: (a) The work of a contractor as defined in RCW 18.27.010 . . . . RCW 51.12.070. The provisions of [the industrial insurance act] apply to all work done by contract; the person, firm, or corporation who lets a contract for such work is responsible primarily and directly for all premiums upon the work. The contractor and any subcontractor are subject to the provisions of this title and the person, firm, or corporation letting the contract is entitled to collect from the contractor the full amount payable in premiums and the contractor in turn is entitled to collect from the subcontractor his or her proportionate amount of the payment. RCW 51.12.070. ¶13 The Board assessed prime contractor liability against Lee's after concluding that Lee's did not establish that Zagy's maintained a principal place of business that would be eligible for an IRS business deduction or a separate set of books or records showing all business income and expenses. A. Principal Place of Business ¶14 Lee's asserts that the Board erroneously interpreted RCW 51.12.070(2) by requiring Lee's to prove that Zagy's maintained a principal place of business that was "in fact" eligible, not that "would be" eligible, for an IRS business deduction. Br. of Appellant at 17. Relying on Littlejohn Construction Co. v. Department of Labor & Industries, 74 Wn. App. 420, 873 P.2d 583 (1994), Lee's maintains that it had to prove only that Zagy's was truly an independent contractor with its own principal place of business. ¶17 Lee's reliance on Littlejohn is misplaced. In that case, the court held that a subcontractor may be liable for its own subcontractor's premiums. Littlejohn, 74 Wn. App. at 427-29. As part of its analysis, the court considered the legislative history of the prime contractor liability statute, including the addition in 1981 of the exception at issue here. Littlejohn, 74 Wn. App. at 427. The court recited the exception's four requirements, citing to RCW 51.12.070(1)-(4) in footnotes. Littlejohn, 74 Wn. App. at 427 & nn. 3-6. It summarized RCW 51.12.070(2) as essentially requiring the subcontractor to be "truly an independent contractor with its own principal place of business." Littlejohn, 74 Wn. App. at 427 (citing RCW 51.12.070(2)). But the court was not interpreting the language of RCW 51.12.070(2); it was interpreting the statute's legislative history. Because the statute is unambiguous, we do not look at the legislative history to find the legislature's intent. Campbell & Gwinn, 146 Wn.2d at 9-10. And Lee's suggested interpretation is improper because it ignores the language requiring that the principal place of business "would be eligible for a business deduction for internal revenue service tax purposes." See State v. J.P., 149 Wn.2d 444, 450, 69 P.3d 318 (2003) (court may not delete words from an unambiguous statute). ¶18 In addition, Lee's points to nothing in the record supporting its argument that the Board interpreted RCW 51.12.070(2) to require Lee's to show that Zagy's maintained a principal place of business that was "in fact" eligible for an IRS tax deduction. The Board consistently used the statutory language "would be eligible" in its discussion and findings. Board R. (BR) at 25-26. The Board did not erroneously interpret RCW 51.12.070(2). ¶20 The Board found that: Sufficient evidence was not presented to establish that Zagy's Drywall had a principal place of business which would be eligible for a business deduction for IRS tax purposes other than that furnished by the contractor for which the business had contracted to furnish services during the second quarter of 2003. BR at 26. ¶21 Under the Internal Revenue Code, a taxpayer is not eligible for a business deduction for use of a dwelling unit that the taxpayer also uses as a residence. 26 U.S.C. § 280A(a). An exception allows a deduction to the extent it is allocable to a portion of the dwelling unit that the taxpayer uses exclusively as the principal place of business on a regular basis. 26 U.S.C. § 280A(c)(1)(A). The term "principal place of business" includes a place that the taxpayer uses for business administration or management if there is no other fixed location for the business. 26 U.S.C. § 280A(c)(1). ¶22 Lee's bore the burden of proving that the Department incorrectly assessed the premiums against him. RCW 51.48.131. Although Jeffrey Lee's testimony showed that Zagy's did not use Lee's offices as its principal place of business, Lee's did not establish that Zagy's maintained a separate place of business that would be eligible for an IRS business deduction. The auditor's testimony, on the other hand, showed that Guerrero used his kitchen table to conduct Zagy's business. Lee's presented no evidence that this use was exclusive or regular such that Zagy's kitchen table would be eligible for an IRS business deduction. ¶23 Lee's asserts that the fact that Guerrero did Zagy's books and records on his kitchen table does not establish that no other portion of his home was eligible for an IRS tax deduction. It also asserts that Guerrero's residence "would be" eligible for an IRS tax deduction if he met all the requirements of 26 U.S.C. § 280A(c). But Lee's burden was to prove that Zagy's met the requirements of RCW 51.12.070(2), not that Zagy's could possibly meet the requirements. And Lee's presented no evidence that Zagy's maintained a principal place of business, on Guerrero's kitchen table or anywhere else, that Guerrero used exclusively to conduct Zagy's business. The Board did not err in so finding. ¶24 Lee's also complains that a contractor has no authority to enter a subcontractor's residence to determine whether the subcontractor uses some portion of the residence exclusively for business purposes on a regular basis and that a contractor is not required to become an expert in interpreting and applying the internal revenue code. As the trial court noted, however, the exception in RCW 51.12.070 creates "a statute of tax avoidance, not tax imposition." Report of Proceedings at 5. Before 1981, a contractor was directly and primarily liable for all subcontractors' premiums without exception. See Littlejohn, 74 Wn. App. at 427-28; see also LAWS OF 1981, Ch. 128, § 4. The exception now provides that a contractor is directly and primarily liable for a subcontractor's premiums unless it protects itself from liability by ensuring that its subcontractors meet all of the exception's requirements. B. Separate Books or Records ¶26 Relying on arguments similar to those for the principal place of business requirement, Lee's also asserts that the Board erred in requiring it to prove that Zagy's maintained a separate set of books and records that "in fact" reflected all items of income and expenses of Zagy's business. Again, we disagree. ¶27 As with the principal place of business requirement, RCW 51.12.070(3)'s language is unambiguous. A subcontractor must maintain "a separate set of books or records that reflect all items of income and expenses of the business." RCW 51.12.070(3). Because this language is not ambiguous, we again follow its plain meaning. Campbell & Gwinn, 146 Wn.2d at 9-10. ¶29 Lee's complains that the Board required Lee's to prove that Zagy's maintained a separate set of books and records that "in fact" reflected all items of income and expenses. But RCW 51.12.070(3) contains no conditional language. The Board did not err in failing to add conditional language to the statute. See J.P., 149 Wn.2d at 450 (court may not add words to an unambiguous statute). The Board did not erroneously interpret RCW 51.12.070(3). ¶31 Again, Lee's bore the burden of showing that the Department incorrectly assessed the premiums against it. RCW 51.48.131. The regular invoices and cancelled checks support a conclusion that Zagy's maintained records of at least its dealings with Lee's. But the auditor testified that Guerrero did not produce a complete set of records for the Department audit. And Lee's produced no further evidence that Zagy's maintained records of all income, including income from sources other than Lee's, or any business expenses. The trial court did not err in finding that Lee's did not present sufficient evidence to prove that Zagy's maintained a separate set of books and records that reflect all items of income and expenses of the business. ¶32 Lee's again objects that it has no authority to inspect its subcontractors' books and records. It also faults the Department for failing to conduct a more thorough investigation of Zagy's records, arguing that the Board should have ruled that the Department failed to present sufficient evidence that Zagy's books and records were incomplete. But the legislature imposed the burden of proof on contractors who seek the benefit of the exemption from prime contractor liability. Neither the Board nor this court can ignore the legislature's clear directive. ¶33 The Board did not err in interpreting RCW 51.12.070 or in finding that Zagy's did not meet the requirements for the prime contractor liability exception. III. DUTY TO COLLECT PREMIUMS FROM ZAGY'S ¶34 Lee's next argues that the Department failed to fulfill a statutory duty to attempt to collect premiums from Zagy's before assessing the premiums against Lee's. ¶35 Unless a subcontractor meets all the requirements of the prime contractor liability exception, a contractor is responsible "primarily and directly" for all industrial insurance premiums on the work. RCW 51.12.070. There is nothing ambiguous about this language. Because Lee's did not establish that Zagy's maintained a principal place of business that would be eligible for an IRS business deduction or a set of books or records reflecting all business income and expenses, Lee's is primarily and directly responsible for the premiums Zagy's owed for the work it did for Lee's and the Department may assess the premiums against Lee's. ¶37 Because Lee's was primarily and directly liable for Zagy's industrial insurance premiums, the Department did not err in assessing prime contractor liability against Lee's. IV. RULEMAKING ¶38 Lee's next asserts that the Department promulgated a rule requiring physical verification of a subcontractor's principal place of business and books and records without following proper rulemaking procedures. ¶39 When the Department issued Lee's the notice of prime contractor liability, it included a document titled "Prime Contractor Liability in the Construction Industry." BR Ex. 12. This document lists the requirements for the prime contractor liability exception (including the fifth requirement added in 2004). It then describes how a contractor can verify a subcontractor's status, stating: You must also physically verify your subcontractors: A. Maintain a complete set of books and records that account for all of the business income and expenses. B. Work out of a principal place of business that qualifies for an IRS business deduction. To qualify, the place of business must be used regularly and exclusively for the business. BR Ex. 12. ¶40 With this argument, Lee's attempts to raise the question of what efforts would satisfy the statute. As we earlier noted, this issue is not before us. Lee's made no attempt either physical or otherwise to determine that Zagy's had a separate tax deductible office and kept books recording all business income and expenses. And the Department did not assess Lee's for failing to physically verify the necessary information. It assessed Lee's because Lee's made no attempt to meet the statutory elements. We decline to consider Lee's argument that the Department improperly adopted the "physically verify" standard or that this standard unconstitutionally mandates private searches on behalf of the government and impaired the contract between Lee's and Zagy's. ¶41 Affirmed. HOUGHTON, C.J., and VAN DEREN, J., concur.