Undercover tax agents drove truckloads of untaxed cigarettes from a Seneca Nation of Indians smoke shop to a Long Island reservation smoke shop as part of the state’s efforts to build a fraud case against a Long Island cigarette wholesaler.

Five times in 2008, agents transported cigarettes from AJ’s Candy & Tobacco, a Seneca tobacco distributor on the Cattaraugus Reservation, to the Peace Pipe Smoke Shop on Long Island’s Poospatuck Reservation.

Last month, the State Tax Appeals Tribunal upheld the state’s action against Gutlove & Shirvint and recommended yanking the tobacco wholesaler’s state license.

The state is losing $436 million a year from the sales of untaxed cigarettes, according to one report done for the state Health Department.

Gutlove & Shirvint devised the scheme, the state Department of Taxation and Finance charged, after tobacco giant Philip Morris refused to sell Marlboros and its other brands to the wholesaler.

Philip Morris found that most of the cigarettes it sold to Gutlove & Shirvint for the Peace Pipe Smoke Shop were being sold illegally in New York City.

The tobacco wholesaler, the tax department found, got around the ban by setting up a phony company in Kentucky to purchase Philip Morris cigarettes. It then sold them to AJ’s Candy & Tobacco, which in turn sold them to Peace Pipe.

“It was a lot of effort on our part and a very successful effort,” Jamie Woodward, the tax department’s acting commissioner, said in an interview with The Buffalo News.

“We found out that Gutlove agents had been acting in ways that were not acceptable to us,” she said.

“They went around and created a whole operation,” she said of Gutlove & Shirvint. “They created this front operation; in our view, they set up this illegal operation, unlicensed, not allowed by us.”

Alyse Pierce, who owns AJ’s Candy & Tobacco on the Cattaraugus Reservation, told The News that she complained to the nation’s Import-Export Commission, the Senecas’ tobacco regulatory agency, after a Gutlove sales representative suggested she and other Seneca retailers set up phony companies. He described the effort as trying to circumvent Philip Morris’ quota system to limit sales to Indian merchants.

Pierce, a board member of the Seneca Nation’s Free Trade Association, said she took part in the ruse against Gutlove at the direction of her tribe’s Import- Export Commission. She said her actions were not against a fellow Indian tribe, the Poospatucks.

“It was against a wholesaler that was trying to take advantage of us,” she said.

The Seneca commission, which has a relationship with the federal Bureau of Alcohol, Tobacco, Firearms and Explosives to counter contraband cigarettes, tipped off the federal bureau to the Gutlove scheme.

The bureau, in turn, worked with state undercover agents to ship 41,000 cartons of cigarettes from AJ’s to the Poospatuck Reservation on Long Island.

Under the plan devised by the investigators, AJ’s handled all the billing, but other Seneca smoke shops handled some shipments. Gutlove & Shirvint spread the sales around so as to not tip off Philip Morris, the state said.

After state and federal investigators compiled evidence, they arranged for state police to seize the last shipment.

Pierce said neither the state nor Gutlove & Shirvint has paid her for the lost shipment.