               IN THE COURT OF APPEALS OF NORTH CAROLINA

                                        No. COA 15-415

                                       Filed: 5 April 2016

Property Tax Commission Sitting as the State Board of Equalization and Review
No. 12 PTC 005

In the Matter of the Appeal of:

Michelin North America, Inc.

from the decision of the Mecklenburg
County Board of Equalization and
Review concerning the discovery of
certain business personal property
and the proposed discovery values
for tax years 2006-2011.




       Appeal by Michelin North America, Inc. from a Final Decision entered 12

December 2014 by Chairman William W. Peaslee in the North Carolina Property Tax

Commission. Heard in the Court of Appeals 21 October 2015.


       Nexsen Pruet, PLLC, by Alexander P. Sands, III, Jason C. Pfister, and David
       S. Pokela, for Appellant-Michelin North America, Inc.

       Ruff Bond Cobb Wade & Bethune, LLP, by Ronald L. Gibson and Robert S.
       Adden, Jr., for Appellee-Mecklenburg County.


       HUNTER, JR., Robert N., Judge.


       Michelin North America, Inc. (“Michelin”) appeals from a Final Decision of the

North Carolina Property Tax Commission determining certain airplane tires held in

Michelin’s Mecklenburg facility are subject to taxation. Michelin contends the tires
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                                  Opinion of the Court



are statutorily excluded from taxation as “inventories owned by manufacturers.” We

agree and therefore reverse the decision of the Property Tax Commission.

                       I. Factual and Procedural Background

      On 4 November 2011, Michelin appealed the assessed value and penalty of the

business’s personal property assessed during a property tax audit to the Mecklenburg

County Board of Equalization and Review.          The audit spanned tax years 2006

through 2011. Michelin contested the valuation of aircraft tires at their facility in

Mecklenburg County.       Following a hearing, the Mecklenburg County Board of

Equalization and Review decided the tires should be valued by using the retail cost

of $488.18 per tire.

      On 5 January 2012, Michelin appealed the decision to the North Carolina

Property Tax Commission. Evidence presented at a hearing before the Property Tax

Commission on 14 August 2014 tended to show the following.

      Bradley McMillen, the technical director for the aircraft tire division at

Michelin testified, describing Michelin’s facility in Mecklenburg and the tires in

question.    Michelin’s Mecklenburg facility is primarily a testing facility.

Approximately half of the tires tested in the Mecklenburg facility are military tires

that must meet military qualifications. The tires at issue fall into three categories,

described below.




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        “Prototype tires,” which are in the development phase, make up approximately

55 percent of the tires in the facility. The tires are completely constructed, but are

not yet qualified to be put on an aircraft. The FAA must approve commercial tires

and the military must approve military tires before an airworthiness certificate will

be awarded, allowing the tires to go into production. Every tire that leaves the facility

to be sold must have an airworthiness certificate attached to the tire. Prototype tires

are either tires that Michelin is developing for new aircraft or tires Michelin is trying

to improve. Prototype tires are destroyed during the testing process.

        “Conformance production tires” are aircraft tires currently in production and

qualified by the FAA or the military. Approximately 30 percent of the tires in the

Mecklenburg facility are conformance production tires. These tires are pulled from

inventory in Michelin factories, and sent to the Mecklenburg facility for testing.

Conformance production tires do not have an airworthiness certificate attached to

them because they will be destroyed in the testing process, and therefore cannot be

sold.

        “Returned goods,” comprising approximately 15 percent of the Mecklenburg

facility’s tires, are used aircraft tires. These tires are used by consumers, and then

returned to the facility to evaluate the tires’ performance in the field. Damaged tires

are returned to determine the cause of the damage. Tires classified as “returned




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goods” belong to the consumer. After testing, these tires go through a denaturing

process, and are subsequently hauled away for disposal or recycling.

      Barry Lindenman, the business personal property audit manager for

Mecklenburg County testified at the hearing. He arrived at a valuation of the tires

by multiplying their average retail value of $488.18 by the number of tires in the

facility, 1,531. Based on Lindenman’s calculations, the total value of the tires is

$547,116 for each taxable year of the audit.

      The Property Tax Commission issued a final decision on 12 December 2014.

The Commission held the returned goods should not be taxed because they remain

the property of the consumer, but the prototype tires and conformance production

tires are subject to taxation. Based on the number of tires falling within those

categories, the Commission concluded the total value of the prototype and

conformance production tires to be $421,628.08 for each year at issue. Over six

taxable years, the total value is $2,529,768.48. Michelin timely filed a Notice of

Appeal challenging the Commission’s conclusion as it related to the prototype tires

and conformance production tires.

                                  II. Jurisdiction

      Jurisdiction lies in this Court pursuant to N.C. Gen. Stat. § 7A-29(a) which

provides for an appeal as of right from any final order or decision of the Property Tax

Commission. N.C. Gen. Stat. § 7A-29(a) (2015).



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                              III. Standard of Review

      This Court reviews appeals from the Property Tax Commission pursuant to

N.C. Gen. Stat. § 105-345.2(b):

             So far as necessary to the decision and where presented,
             the court shall decide all relevant questions of law,
             interpret constitutional and statutory provisions, and
             determine the meaning and applicability of the terms of
             any Commission action. The court may affirm or reverse
             the decision of the Commission, declare the same null and
             void, or remand the case for further proceedings; or it may
             reverse or modify the decision if the substantial rights of
             the appellants have been prejudiced because the
             Commission’s findings, inferences, conclusions or decisions
             are:

             (1) In violation of constitutional provisions; or

             (2) In excess of statutory authority or jurisdiction of the
             Commission; or

             (3) Made upon unlawful proceedings; or

             (4) Affected by other errors of law; or

             (5) Unsupported by competent, material and substantial
             evidence in view of the entire record as submitted; or

             (6) Arbitrary or capricious.

N.C. Gen. Stat. § 105-345.2(b) (2015).

      We review Property Tax Commission decisions under the whole record test to

determine whether a decision has a rational basis in the evidence or whether it was

arbitrary or capricious. In re McElwee, 304 N.C. 68, 87, 283 S.E.2d 115, 127 (1981).



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“The “whole record” test does not allow the reviewing court to replace the

[Commission’s] judgment as between two reasonably conflicting views, even though

the court could justifiably have reached a different result had the matter been before

it de novo.” In re Parkdale America, 212 N.C. App. at 194, 710 S.E.2d at 450–451

(quoting In re McElwee, 304 N.C. at 87–88, 283 S.E.2d at 127). If the Commission’s

decision, considered in light of the foregoing rules, is supported by substantial

evidence, it cannot be overturned. In re Philip Morris U.S.A., 130 N.C. App. 529, 533,

503 S.E.2d 679, 682 (1998).

                                     IV. Analysis

      Generally, all real and personal property is subject to taxation under The

Revenue Act unless it is excluded from the tax base by statute or the North Carolina

Constitution. N.C. Gen. Stat. § 105-274(a) (2015). A party claiming a statutory

exemption bears the burden “of bringing [it]self within the exemption or exception.”

Parkdale America, LLC v. Hinton, 200 N.C. App. 275, 278, 684 S.E.2d 458, 461 (2009).

      “Inventories owned by manufacturers” is one such category statutorily

excluded from the tax base. N.C. Gen. Stat. § 105-275(33) (2015). “Inventory” and

“manufacturer” are terms of art defined by statute. Inventory includes five different

statutory definitions. At issue in this case is the third definition of inventory:

             As to manufacturers, raw materials, goods in process,
             finished goods, or other materials or supplies that are
             consumed in manufacturing or processing or that
             accompany and become a part of the sale of the property


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                                        Opinion of the Court



               being sold. The term does not include fuel used in
               manufacturing or processing and materials or supplies not
               used directly in manufacturing or processing.

N.C. Gen. Stat. § 105-273(8a)(c) (2015). The meaning of “finished goods” within the

definition of inventory is not currently defined by statute.1 A manufacturer is a

taxpayer “regularly engaged in the mechanical or chemical conversion or

transformation of materials or substances into new products for sale or in the growth,

breeding, raising, or other production of new products for sale.” N.C. Gen. Stat. §

105-273(10b) (2015).

       Here, Michelin’s status as a manufacturer is not challenged on appeal.

Because findings of fact not challenged on appeal are binding on this Court, we accept

Michelin’s status as a manufacturer. See Ferreyra v. Cumberland County, 175 N.C.

App. 581, 582, 623 S.E.2d 825, 826 (2006).

       During oral arguments on 21 October 2015, Michelin argued the tires used for

testing are finished goods under the statutory definition of inventory because the tires

have completed the manufacturing process.                  The tires are thus “finished” or

completed goods before they are then used for testing. In response, Mecklenburg

County conceded the tires in question are “finished goods.”




       1  In 1985, the legislature defined “finished goods” as “articles of tangible personal property
that are ready for sale.” N.C. Sess. Laws 1985-656. However, the legislature repealed the definition
in 1991. N.C. Sess. Laws 1991-45.

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                                   Opinion of the Court



      Mecklenburg     County    contends     the    statutory   phrase   “consumed   in

manufacturing or processing or that accompany and become a part of the sale of the

property being sold” refers to raw materials, goods in process, finished goods, or other

materials or supplies. In other words, to fall within the statute, finished goods would

need to be “consumed in manufacturing or processing or . . . accompany and become

a part of the sale of the property being sold.” To support its argument, Mecklenburg

County argues that when interpreting a statute, “the legislature is presumed to have

intended a purpose for each sentence and word in a particular statute, and a statute

is not to be construed in a way which makes any portion of it ineffective or

redundant.” Peace River Electric Cooperative v. Ward Transformer Co., 116 N.C. App.

493, 502, 449 S.E.2d 202, 209 (1994).

      In order to determine whether Mecklenburg County’s interpretation is correct,

we must interpret the statutory definition of inventory.

             Where the language of a statute is clear and unambiguous,
             there is no room for judicial construction and the courts
             must construe the statute using its plain meaning. But
             where a statute is ambiguous, judicial construction must
             be used to ascertain the legislative will. The primary rule
             of construction of a statute is to ascertain the intent of the
             legislature and to carry out such intention to the fullest
             extent. This intent must be found from the language of the
             act, its legislative history and the circumstances
             surrounding its adoption which throw light upon the evil
             sought to be remedied.




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Burgess v. Your House of Raleigh, Inc., 326 N.C. 205, 209, 388 S.E.2d 134, 136–137

(1990) (internal citations and quotations omitted).

      In 1985, the General Assembly amended The Revenue Act with House Bill 222,

entitled An Act to Provide Broad-Based Tax Relief to North Carolina Citizens. N.C.

Sess. Law 1985-656. In this bill, the legislature defined inventory as

             goods held for sale in the regular course of business, raw
             materials, goods in process of manufacture or processing,
             and other goods and materials that are used or consumed
             in the manufacture or processing of tangible personal
             property for sale or that accompany and become a part of
             the property as sold. The term does not include fuel used
             in manufacturing or processing.

N.C. Sess. Laws 1985-656. At this time, the definition of inventory did not include

the term “finished goods.”

      The same year, the General Assembly enacted “clarifying” legislation

amending The Revenue Act. N.C. Sess. Laws 1985-947. This bill amended the

definition of inventory to include the term finished goods for the first time.

             ‘Inventories’ means goods held for sale in the regular
             course of business by manufacturers and retail and
             wholesale merchants. As to manufacturers, the term
             includes raw materials, goods in process, and finished
             goods, as well as other materials or supplies that are
             consumed in manufacturing or processing, or that
             accompany and become a part of the sale of the property
             being sold. . . .

N.C. Sess. Laws 1985-947 (emphasis added). The language “as well as” shows the

legislature meant to include “other materials or supplies that are consumed in


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manufacturing or processing” in addition to raw materials, goods in process, and

finished goods within the definition of inventory.      Accordingly,   consumed in

manufacturing or processing modifies only “materials or supplies” and not “finished

goods.”

      On 16 July 1987, the General Assembly ratified House Bill 1155, including for

the first time the tax exemption for “inventories owned by manufacturers.” N.C. Sess.

Laws 1987-622. In August 1987, the legislature amended the definition of inventories

again, expanding it to include agricultural products by adding a sentence to the

definition. N.C. Sess. Laws 1987-813. The language quoted above from the 1985

legislation remained unchanged. Id. Thus, after the legislature added an exemption

for “inventories owned by manufacturers,” it then expanded the definition of

inventory.   The legislature also retained the “as well as” language, separating

“finished goods” from materials or supplies consumed in manufacturing.

      In 1991, the General Assembly considered the definition of inventory again,

making changes to other parts of the definition, but leaving intact the sentence at

issue in this appeal: “As to manufacturers, the term includes raw materials, goods

in process, and finished goods, as well as other materials or supplies that are

consumed in manufacturing or processing, or that accompany and become a part of

the sale of the property being sold.” N.C. Sess. Laws 1991-975 (emphasis added).




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       The legislature reconsidered the definition of “inventory” again in 2008,

bringing the statutory definition to its current version. At this time, the legislature

broke down the definition into five subsections, including subsection c, relating to

manufacturers which includes the sentence at issue here:

             As to manufacturers, the term includes raw raw materials,
             goods in process, and finished goods, as well as or other
             materials or supplies that are consumed in manufacturing
             or processing, processing or that accompany and become a
             part of the sale of the property being sold.

N.C. Sess. Laws 2008-35 (showing changes from 1991 definition). The changes do not

evidence an intent to change the meaning of the definition of inventory. Instead, the

changes show the legislature intended to clean-up the definition by breaking down

one large definition into five subsections for ease of use. The change of “as well as”

to “or” reflects the deletion of the phrase “the term includes,” changing a conjunctive

list to a disjunctive list while retaining the same meaning. Still, the statute is a list.

Now joined by “or,” the bill shows no evidence the legislature acted to change “other

materials or supplies consumed in manufacturing or processing” into a clause

modifying finished goods. Instead, the legislature continued to include it as part of

the list.

       As a result, “finished goods” is not modified by materials or supplies consumed

in manufacturing.      Because the parties agree both the prototype tires and

conformance production tires are finished goods within the meaning of the statute,



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the tires fall within the statutory definition of inventory. The parties also agree

Michelin is a manufacturer under the applicable statute.      Thus, the tires are

“inventories owned by manufacturers” under N.C. Gen. Stat. § 105-275(33), and are

excluded from taxation in North Carolina.

                                 V. Conclusion

      For the foregoing reasons, the Final Decision of the North Carolina Property

Tax Commission is reversed. The airplane tires at issue are excluded from taxation

as inventory owned by a manufacturer pursuant to N.C. Gen. Stat. § 105-273(33).

      REVERSED.

      Judges GEER and DILLON concur.




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