Should I convert empty varchar values to NULL?
As a DBA, your sacred duty is to take whatever data was entrusted to you, and leave it as is.

A NULL in a field usually means "DATA was not entered" or "DATA is not applicable" (but can have other meanings - it is context specific), and may actually MEAN something to the business layer. An empty string may actually be what the user entered and WANTS. Of course, I am generalizing - possibly the reason you get either NULLs or '' (empty strings) is due to some sloppy coding in the business layer (let us hope not, though).

Either way, have a chat with whoever provides the Middle Tier and see what they are using NULL vs Empty String for - and then go from there. Maybe they are thinking that they always pass in an Empty String (or always NULLS) and are not aware of the randomness (in which case advise them on what you think should be the standard), or maybe NULL really is information to them