Appeal by respondent from order entered 20 September 2000 by
Judge W. Douglas Albright in Forsyth County Superior Court. Heard
in the Court of Appeals 26 November 2001.
Kilpatrick Stockton LLP, by Alan H. McConnell and Theodore C.
Edwards, II, for petitioner-appellee.
Attorney General Roy A. Cooper, III, by Assistant Attorney
General Nancy E. Scott, for respondent-appellant.
MARTIN, Judge.
On 16 April 1998, petitioner, R.J. Reynolds Tobacco Company
("Reynolds") applied to respondent, North Carolina Department of
Environment and Natural Resources (“DENR”) for tax certification of
certain newly installed equipment as solid waste recycling or
resource recovery equipment, pursuant to G.S. §§ 105-275(8)(b),
105-122(b), 105-130.5, and 105-130.10. By letter dated 4 September
1998, DENR denied Reynolds' tax certification application, based
upon its assertion that the materials processed by the equipment
were not waste materials. Reynolds petitioned for a contested case
hearing pursuant to G.S. § 150B-23.
The Tax Certification Program, codified at G.S. §§ 105-
275(8)(b), 105-122(b), 130A-290(35), 105-130.5, and 105-130.10
provides tax benefits for capital investments in facilities andequipment used exclusively for resource recovery or recycling of
or from solid waste. These tax benefits include the exclusion of
real and personal property from the local city and county ad
valorem tax base, deduction of the value of the facilities and
equipment from the value of property upon which the corporate
franchise tax is levied, and rapid amortization of the
construction, purchase and installation cost of the facilities,
resulting in increased deductions from corporate taxable income.
DENR must certify a facility's eligibility for participation before
a facility receives any tax benefits for its recycling program.
Reynolds first submitted a request to DENR for tax
certification for a resource recovery facility and equipment in
Building 603 at its Whitaker Park manufacturing facility in 1982.
DENR issued Reynolds a tax certification covering the building,
land, and equipment listed in the application. From 1986 until
1995, Reynolds applied for and received eight additional tax
certifications from DENR for new equipment purchased and installed
in Building 603 at Whitaker Park. DENR conducted an inspection
before granting certification upon each of these applications.
DENR issued its 4 September 1998 letter denying Reynolds' April
1998 application, the first time it had denied an application for
tax certification for Building 603, without conducting any
inspection.
In manufacturing tobacco products, Reynolds buys tobacco
leaves at auction. The tobacco is sent to a stemmery, where the
stems (hard, woody part of the leaf) are separated from the laminaportion of the leaf (material in between the stems). The
separation process also generates small scraps of tobacco (scraps)
and very fine scraps of tobacco (dust). The usable tobacco lamina
material is sent to the manufacturing operation where it is
blended and processed into cigarettes. The stems, scraps and dust
are packed into containers and sent to a storage facility until
they are either processed into reconstituted sheet tobacco,
through a process known as the G-7 process, or are discarded. The
reconstituted sheet tobacco is shredded and blended with the
processed lamina strips and made into filler for cigarettes. The
reconstituted tobacco filler is part of most brands of cigarettes
made by Reynolds, and enables cigarettes to be made with lower tar
and nicotine content which has been demanded by smoking consumers.
Reynolds uses approximately seventy million pounds of tobacco
stems, scrap and dust each year in making reconstituted sheet
tobacco. Reynolds also disposes of between five and seven million
pounds of tobacco waste materials in landfills each year. This
material is of a lower quality than the stems, scrap and dust used
in the G-7 process; much of it is generated by the manufacturing
process, rather than the stemmery, though some tobacco waste
generated by the stemmery is also disposed of.
In order to keep up with its production requirements for
reconstituted tobacco, Reynolds imports tobacco stems purchased
overseas. Reynolds sells reconstituted tobacco to other
manufacturers of tobacco products, and manufactures reconstituted
sheet tobacco for other tobacco manufacturers, using stems,scraps and dust supplied by them. One of Reynolds' witnesses
testified that even if there were no tax incentives for recycling
and resource recovery of or from solid waste, Reynolds would still
operate the G-7 process because of its cost-effectiveness.
An administrative law judge issued a recommended decision
upholding DENR's denial of Reynolds' 1998 application for tax
certification. DENR subsequently issued its final agency
decision, in which it adopted the recommended decision of the
administrative law judge and denied certification. Reynolds filed
a timely petition for judicial review of the final agency decision
pursuant to G.S. § 150B-43 et seq. The Forsyth County superior
court reversed the final agency decision and ordered DENR to
approve Reynolds' application for tax certification. The superior
court concluded that the tobacco scrap, stems and dust used to
make reconstituted sheet tobacco are "solid waste" within the
meaning of G.S. § 130A-290(35) and therefore Reynolds' resource
recovery and recycling equipment qualified for inclusion in the
North Carolina Tax Certification Program. The court also
concluded that DENR's final agency decision was not supported by
substantial evidence, was in excess of its statutory authority
because DENR had failed to inspect the Reynolds facility after
receiving a complete application for tax certification as required
by 15A NCAC 13B.1508(d), and was arbitrary and capricious. DENR
appeals.
Judicial review of administrative agency decisions is
governed by the North Carolina Administrative Procedure Act (APA),codified at Chapter 150B of the General Statutes. Henderson v.
N.C. Dept. of Human Resources, 91 N.C. App. 527, 372 S.E.2d 887
(1988). The superior court is authorized to reverse or modify an
agency's final decision under G.S. § 150B-51(b)
if the substantial rights of the petitioners
may have been prejudiced because the agency's
findings, inferences, conclusions, or
decisions are:
(1) In violation of constitutional
provisions;
(2) In excess of the statutory
authority or jurisdiction of the
agency;
(3) Made upon unlawful procedure;
(4) Affected by other error of law;
(5) Unsupported by substantial evidence
admissible under G.S. 150B-29(a),
150B-30, or 150B-31 in view of the
entire record as submitted; or
(6) Arbitrary or capricious.
The proper standard of review by the superior court is determined
by the particular issues presented on appeal. In re Appeal by
McCrary, 112 N.C. App. 161, 435 S.E.2d 359 (1993). When the
petitioner contends the agency decision was affected by an error
of law, G.S. § 150B-51(b)(1)(2)(3) & (4), de novo review is the
proper standard; if it is contended the agency decision was not
supported by the evidence, G.S. § 150B-51(b)(5), or was arbitrary
and capricious, G.S. § 150B-51(b)(6), the whole record test is the
proper standard. Dillingham v. N.C. Dept. of Human Resources, 132
N.C. App. 704, 513 S.E.2d 823 (1999). The reviewing court may be
required to utilize both standards of review if warranted by the
nature of the issues raised. McCrary, 112 N.C. App. 161, 435
S.E.2d 359.
In seeking judicial review of DENR's decision in this case,Reynolds alleged that the decision was based on an error of law,
that the decision was not supported by the evidence, and that the
decision was arbitrary and capricious. Therefore, the superior
court was required to employ both a de novo review for errors of
law, and a whole record review to determine whether DENR's
decision was supported by substantial evidence and whether it was
arbitrary and capricious. Our review of the superior court's
decision requires that we review the order for error of law to
determine whether that court employed the appropriate standard of
review and whether it did so correctly. ACT-UP Triangle v. Comm'n
for Health Services, 345 N.C. 699, 483 S.E.2d 388 (1997).
I.
In those cases where the superior court is required to employ
a
de novo standard of review of the agency's decision, appellate
review of the superior court's order requires that this Court also
review the agency's decision
de novo. McCrary,
supra. De novo
review requires the court to “'consider a question anew, as if not
considered or decided by the agency' previously . . . ." and to
“make its own findings of fact and conclusions of law . . .”
rather than relying upon those made by the agency.
Jordan v.
Civil Serv. Bd. of Charlotte, 137 N.C. App. 575, 577, 528 S.E.2d
927, 929 (2000) (citation omitted).
The Tax Certification Program provides an exemption from
taxation for
[r]eal or personal property that is used or,
if under construction, is to be used
exclusively for recycling or resource
recovering of or from solid waste, if theDepartment of Environment and Natural
Resources furnishes a certificate to the tax
supervisor of the county in which the property
is situated stating the Department of
Environment and Natural Resources has found
that the described property has been or will
be constructed or installed, complies or will
comply with the rules of the Department of
Environment and Natural Resources, and has,
or
will have as its primary purpose recycling or
resource recovering of or from solid waste.
N.C. Gen. Stat. § 105-275(8)(b) (emphasis added). Thus, whether
the tobacco stems, scraps and dust used in Reynolds' G-7 process
is “solid waste” is critical to a determination of this matter.
G.S. § 130A-290(35) provides in pertinent part:
"Solid waste" means any hazardous or
nonhazardous garbage, refuse or sludge from a
waste treatment plant, water supply treatment
plant, or air pollution control facility,
domestic sewage and sludges generated by the
treatment thereof in sanitary sewage
collection, treatment and disposal systems,
and other material that is either discarded or
is being accumulated, stored or treated prior
to being discarded, or has served its original
intended use and is generally discarded,
including solid, liquid, semisolid or
contained gaseous material resulting from
industrial, institutional, commercial and
agricultural operations, and from community
activities . . . (emphasis added).
Whether the tobacco stems, scrap and dust used by Reynolds in its
G-7 process to make reconstituted sheet tobacco comes within the
statutory definition, then, is a question of law.
McCrary, supra.
(Incorrect statutory interpretation constitutes an error of law).
In reviewing DENR's denial of Reynolds' 1998 application for tax
certification, the superior court found the evidence in the
official record with respect to Reynolds' use of the G-7 process
to make reconstituted sheet tobacco from stems, scrap and tobaccodust supported a conclusion that such materials are “solid waste”
within the meaning of G.S. § 130A-290(35)
. The superior court
concluded that DENR's conclusion to the contrary in its Final
Agency Decision was an error of law. In so doing, the superior
court correctly utilized the
de novo standard of review. In order
for this Court to properly conduct its review of the superior
court order, we must also review
de novo DENR's conclusion that
“[t]obacco scrap, tobacco stems, and tobacco dust used in the G-7
process are not 'solid waste' within the meaning of N.C. Gen.
Stat. § 130A-290(35).”
McCrary, supra.
"Statutory interpretation properly begins with an examination
of the plain words of the statute."
Correll v. Division of Social
Servs., 332 N.C. 141, 144, 418 S.E.2d 232, 235 (1992). "If the
language of the statute is clear and is not ambiguous, we must
conclude that the legislature intended the statute to be
implemented according to the plain meaning of its terms."
Hyler
v. GTE Prods. Co., 333 N.C. 258, 262, 425 S.E.2d 698, 701 (1993).
"[A] statute must be considered as a whole and construed, if
possible, so that none of its provisions shall be rendered useless
or redundant."
Builders, Inc. v. City of Winston-Salem, 302 N.C.
550, 556, 276 S.E.2d 443, 447 (1981). "It is presumed that the
legislature intended each portion to be given full effect and did
not intend any provision to be mere surplusage."
Id. (citations
omitted).
Though we have held that "tax exemption statutes must
be strictly construed against exemption . . .,"
we have observed
“that such statutes should not be given a narrow or stingyconstruction."
In re Wake Forest University, 51 N.C. App. 516,
521, 277 S.E.2d 91, 94,
disc. review denied, 303 N.C. 544, 281
S.E.2d 391 (1981) (citations omitted)
.
Applying these tenets to the statutory definition of “solid
waste,” we conclude that the tobacco scrap, stems and dust used in
Reynolds' G-7 process fall within it. The statutory definition
includes “material that is either discarded or is being
accumulated, stored or treated prior to being discarded . . . .”
The language of the statute is clear and we must interpret the
statute according to the plain meaning of its terms. The record
evidence before DENR is undisputed that the tobacco stems, scrap
and dust are waste materials generated in the stemmery, that
Reynolds accumulates and stores such materials after the tobacco
lamina leaves the stemmery, and that such materials remain in
storage until they are either used in the G-7 process or
discarded. Were it not for the G-7 process, all of the stems,
scrap and dust generated by the stemmery process would be
discarded. Thus, we hold that the tobacco stems, scrap and dust
utilized in Reynolds' G-7 process are “solid waste” within the
meaning of G.S. § 130A-290(35).
In so holding, we reject DENR's argument that our decision
should be guided by federal case law interpreting the definition
of “solid waste” as used in the federal Resource Conservation and
Recovery Act (RCRA), 42 USC § 6901
et seq. North Carolina's
statute contains broader language than the federal statute in
defining “solid waste,” expanding the phrase "other discardedmaterial" contained in the federal definition, 42 USC § 6903(27),
to include "and other material that is either discarded or is
being accumulated, stored or treated prior to being discarded, or
has served its original intended use and is generally discarded."
N.C. Gen. Stat. § 130A-290(35). Because the state definition is
broader than the federal definition, we will not rely on federal
case law in our interpretation.
II.
In reviewing Reynolds' contentions that DENR's final decision
was not supported by substantial evidence and was arbitrary and
capricious, the superior court was required to conduct a whole
record review. In its order, the superior court asserted that it
had “reviewed the entire record in this matter and applied the
'whole record' test . . . .”
"The 'whole record' test requires the reviewing court to
examine all competent evidence (the 'whole record') in order to
determine whether the agency decision is supported by 'substantial
evidence.'"
Amanini v. N.C. Dept. of Human Resources, 114 N.C.
App. 668, 674, 443 S.E.2d 114, 118 (1994). Substantial evidence
has been defined as "such relevant evidence as a reasonable mind
might accept as adequate to support a conclusion."
Comr. of Ins.
v. Rating Bureau, 292 N.C. 70, 80, 231 S.E.2d 882, 888 (1977). In
applying the whole record test, the reviewing court must "take
into account both the evidence justifying the agency's decision
and the contradictory evidence from which a different result could
be reached."
Lackey v. Dept. of Human Resources, 306 N.C. 231,238, 293 S.E.2d 171, 176 (1982). Under this test, the reviewing
court is not allowed to replace the agency's judgment as between
two reasonably conflicting views, even though the court could
justifiably have reached a different conclusion had the matter
been before it
de novo.
Meads v. N.C. Dept. of Agric., 349 N.C.
656, 509 S.E.2d 165 (1998). Additionally, a decision by an
administrative agency "is arbitrary and capricious if it clearly
evinces a lack of fair and careful consideration or want of
impartial, reasoned decisionmaking."
Joyce v. Winston-Salem State
Univ., 91 N.C. App. 153, 156, 370 S.E.2d 866, 868,
cert. denied,
323 N.C. 476, 373 S.E.2d 862 (1988).
DENR contends that there was substantial evidence to support
its denial of Reynolds' application for tax certification and that
the superior court misapplied the whole record test by
impermissibly substituting its judgment for that of the agency by
omitting all or part of many of DENR's findings of fact, by adding
new findings of fact, and by basing its conclusions of law on the
court's findings rather than the agency's findings. We reject
DENR's contentions.
DENR specifically argues that the trial court erred in
omitting DENR's findings that Reynolds has not discarded the
tobacco stems, scrap and dust used to make reconstituted sheet
tobacco but instead has aged and stored these materials before
reconstituting them into sheet tobacco. However, whether Reynolds
has discarded the materials is irrelevant to the inquiry of
whether the tobacco stems, scrap and dust are "solid waste;" thedefinition of "solid waste," as discussed earlier, includes ". .
. material that is either discarded
or is being accumulated,
stored or treated prior to being discarded . . . ." N.C. Gen.
Stat. 130A-290(35) (emphasis added). Therefore, there is no
requirement that the materials actually be discarded. DENR's
argument, carried to its logical conclusion, would mean that
taxpayers who successfully recycle waste materials would no longer
qualify for tax certification because they no longer discard the
waste materials. Such a proposition would be absurd and clearly
contrary to the legislative intent to encourage the recovery and
recycling of solid waste.
For similar reasons, we reject DENR's arguments that the
superior court erred in omitting DENR's findings: (1) that
reconstituted sheet tobacco is integral and necessary to almost
all of Reynolds' brands of cigarettes, where it has been a major
tool for designing cigarettes with lower tar and nicotine content,
as demanded by the smoking public; (2) that Reynolds buys tobacco
stems overseas to keep up with its production requirements for
reconstituted tobacco; (3) that Reynolds finds it is economical to
utilize as much of the tobacco leaf as possible in its products;
(4) that tax incentives were not determinative of whether Reynolds
operated the G-7 process and that Reynolds would continue to
operate the G-7 process without the tax certification program; and
(5) that reconstitution of tobacco stems, scrap, and dust is
widespread throughout the tobacco industry. These findings merely
show that Reynolds has successfully incorporated its recyclingprocess into its manufacturing program; such findings have no
bearing on whether the materials should be considered "solid
waste." Therefore, it was unnecessary for the superior court to
have included these findings in its order.
DENR further contends the superior court erred in omitting
its findings of fact with respect to its previous certifications
of Reynolds' G-7 facility and equipment, and DENR's explanation
for denying the 1998 application when it had approved nine similar
applications, beginning in 1982. None of these findings were
relevant, however, to a determination of whether there was
substantial evidence supporting the agency's denial of Reynolds'
1998 application for tax certification.
DENR additionally contends the superior court erred by
finding the following facts in its order:
18. Without the G-7 process, the tobacco
scrap, stems and dust could not be used to
make cigarettes.
19. Without the G-7 process, most of
Reynolds' tobacco scrap, stems, and dust would
be discarded in landfills.
Such facts, however, were made in regard to the superior court's
determination that the materials were "solid waste," a matter of
law to be decided under
de novo review, as previously discussed.
For the foregoing reasons, we conclude that the superior
court did not impermissibly apply its judgment for that of the
agency in conducting the whole record review in this case. After
carefully reviewing the whole record before the agency in this
matter, we agree with the trial court that there was notsubstantial evidence to support the agency's decision that the
materials utilized in Reynolds' G-7 process were not “solid waste”
and denying tax certification to the land and equipment associated
with that process.
The superior court also concluded that DENR's failure to
inspect the Building 603, Whitaker Park facility, as required by
15A NCAC 13B.1508(d), prior to its decision to deny the
application was “indicative of a lack of fair and careful
consideration by DENR” and that its denial of Reynolds' 1998
application was arbitrary and capricious. 15A NCAC 13B.1500
et
seq. sets forth standards for the special tax treatment given
resource recovery equipment and facilities. Applications for tax
certification are governed by rule .1508 which provides, in
pertinent part, that upon “proper receipt” of the information
required by the rule “a representative of the Division of Solid
Waste Management shall inspect said facilities and equipment.”
15A NCAC 13B.1508(d).
DENR argues that if the application discloses on its face
that the facility is not eligible for certification, no inspection
is required, as there has been no “proper receipt” of an
application. We need not decide, in this case, what constitutes
a “proper receipt” or when inspection is required; the record
shows that DENR had inspected this same facility on nine previous
occasions, had approved certification for the facility after each
of those inspections, and denied certification of the 1998
application after erroneously characterizing the materialsutilized in the process as “home scrap,” an error which would have
been apparent upon inspection. Under these circumstances, we
agree with the trial court's conclusion that DENR's denial of the
application without inspection evinced a lack of fair and careful
consideration and was arbitrary and capricious.
Because the superior court is authorized to reverse an agency
decision upon any of the grounds specified in G.S. § 150B-51(b),
and we have determined the court in this case was correct in its
conclusion that DENR's denial of Reynolds' application was
affected by an error of law and was arbitrary and capricious, we
need not discuss DENR's remaining arguments with respect to the
superior court's order. For the foregoing reasons, we affirm the
superior court's reversal of DENR's final agency decision denying
Reynolds' 16 April 1998 application for tax certification of the
land and equipment associated with its G-7 process for
reconstituted sheet tobacco and its order requiring DENR to
approve the application.
Affirmed.
Chief Judge EAGLES and Judge BIGGS concur.
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