ALBANY – The Pataki administration is formally dropping a plan to collect state taxes from Indian retailers, despite being ordered to do so by the Legislature last year.

After drafting regulations to enforce the law and then delaying implementation for a total of 12 months, the Department of Taxation and Finance on September 23 quietly allowed the rules to lapse. At this point, the department would have to republish the rules and hold another round of public hearings before putting them into effect.

The department’s inaction means stores on Indian reservations can continue selling tax-free cigarettes, gasoline, and other products to non-Indians without repercussions from the state.

Proponents of tougher enforcement say such tax-free sales undermine efforts to discourage smoking; create unfair competition for non-Indian retailers; contribute to the black market for cigarettes, and cost the state hundreds of millions of dollars in revenue.

Indian tribes argue that they are sovereign nations not subject to state tax laws. Previous efforts to collect the taxes have led to violent clashes between Indians and state police. Governor Pataki says he prefers to resolve the issue in negotiations with Indian nations.

“The department is aware that these regulations have expired, and we are reviewing all potential options for addressing this issue through cooperation, not confrontation,” said a spokesman for the tax department, Thomas Bergin.

The maneuver irked Assemblyman Jeffrey Klein of the Bronx, the sponsor of bills to crack down on evasion of cigarette taxes at Indian reservations and through the Internet.

“They have court decisions in their favor,” Mr. Klein said. “They have the law on their side. … They just refuse to enforce the law….Instead of being upfront about it and saying that, they use cheap tricks and allow regulations to lapse.”

Based on industry figures, Mr. Klein estimated the state is losing between $300 million and $500 million a year in revenue.