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NEW YORK - While the New York State Police are worried about a confrontation if the state tries to block the sale of tax-free cigarettes on New York's Indian reservations, local Seneca Nation of Indian officials say the ongoing discussion could be an opening to establish a lasting peace.

The state held a hearing Tuesday called by state Sen. Craig Johnson, D-Nassau, to discuss tax collections on sales made to non-Indians on reservations and why they have not been collected, and busloads of Seneca Nation residents attended to discuss why they oppose such collections.

Previous attempts to collect state taxes on reservation commerce drew protests from Senecas, who said further attempts will lead to them defending treaties the nation has made with the federal government.

"We will never allow the state to tax our commerce," said Tribal Councilor J.C. Seneca during the hearings. "No other government has the right to interfere. We will fight to uphold these rights now and forever.''

Peter Kiernan, Gov. David Paterson's chief legal counsel, said a New York State Police threat assessment predicted the cost of enforcing tax collections on cigarettes sold on reservations could approach $2 million a day - a figure based on the state's experiences when it tried to impose cigarette taxes in 1992 and 1997 - and fears collection could lead to violence and possibly escalate into a ''military problem.''

There is another way, however, Seneca said.

"It's a chance to work to establish lasting peace," Seneca said about what could happen if the state chooses to work with the Senecas rather than start a confrontation. He said the nation has its own Import/Export Commission with a stamping agent, sales prohibitions to minors and a regulation that does not allow for more than 49 cartons of cigarettes to be sold per transaction. He said the nation has worked with U.S. and local law enforcement and generates funding for the state from its sales as customers to its land have money left to use off-territory.

Seneca said the state has created its own problems by increasing taxes and driving consumers away from taxable sales.

"It's true your citizens don't pay your taxes," he said about those who look elsewhere for tax-free sales. Despite that, he said, the nation will never be New York's scapegoat.

"You have a tax problem," said Seneca Counsel Bob Porter. "It's just not us."

When Sen. Martin Golden asked if an agreement could be negotiated to deal with the tax issue, Seneca said agreements have already been made and referred to existing treaties. When asked if Senecas would resort to violence, Seneca said he does not condone violence. He said, however, when tax collection attempts were previously tried, state police "invaded" Seneca territory.

"What would you do if somebody invaded your neighborhood?" Seneca asked.

He said Senecas cannot be forced to become tax collectors for the state, but rather have been promised "free use and enjoyment" of their lands by the federal government.

While some senators at the hearings agreed with the Senecas' stance, others called for tax collections to begin in spring. They reported New Yorkers have had to suffer from high taxes and are facing budget cuts while a revenue source remains uncollected. Golden, a Brooklyn Republican, said he favors a ''drop dead'' date to start charging the tax whether there is an agreement or not.

Gov. Paterson's representatives speaking at the hearing, however, said once state police costs are taken into account to quell unrest from collections, tax collections would not be financially beneficial.

If the state chooses to forego the tax collection efforts, Seneca still may have a request toward the goal of respect: changing the decor of the governor's office.

Seneca told of how he feels each time he enters that office and sees decor featuring a Native American being killed. He questioned how senators would feel if Senecas decorated their leaderships' chambers with a Native American killing a white man and then invited senators to come in to discuss mutual respect.

"We delivered a message. We needed to provide perspective,'' said Seneca later about the hearings he said went well.

Seneca maintaining sovereignty needs to be kept when discussing issues, including taxes, with Senecas.

"It makes us who we are today," he said.