By MICHAEL VIRTANEN and JOHN KEKIS
Associated Press

SYRACUSE - State and county lawyers told New York's top court Thursday that officials can tax Indian cigarettes and prosecute sellers of untaxed smokes.

A lawyer for the Cayuga Indian Nation countered that authorities are encroaching on tribal rights, and the tribe does not have to collect the tax for the state from non-Indian smokers.

About 100 Indian protesters gathered across from the courthouse in Syracuse, where the Court of Appeals was hearing the case. They included Cayugas, as well as Senecas and Mohawks from Western and Northern New York. Two protesters drummed and chanted, while many carried placards that read: "Break a treaty, break the law" and "Whether we are poor or prosperous the treaties still stand."

Indian smoke shops have enjoyed a huge business in cigarettes since the mid-1990s, partly because of a string of governors who have refused to enforce state laws that were supposed to set up a system for taxing sales to the general public.

The Cayugas began selling untaxed cigarettes in 2003, the same year the New York Legislature passed a measure to tax reservation cigarette sales to non-Indians.

Seneca and Cayuga county officials seized 176,000 cartons of unstamped cigarettes in 2008, leading to the lawsuit by the Cayugas.

The court is expected to rule on the dispute next month.

In August, a trial judge refused to order the return of the seized cigarettes at the Cayugas' two upstate New York convenience stores.

Supreme Court Justice Hon. Kenneth Fisher, who had initially ruled that the tribe could not sell untaxed cigarettes, said that while a midlevel court's reversal of his decision changed the landscape somewhat, the cigarettes were still evidence seized as part of a criminal action and didn't have to be returned with the appeal pending.

Fisher also denied the tribe's request that the counties put up a bond to cover the value of the cigarettes, estimated at more than $500,000.

County officials said the tribe's LakeSide Trading stores in Union Springs and Seneca Falls owe $485,000 in state excise taxes.