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NEW YORK (Reuters) - At Island Smokes in New York City's Lower East Side neighborhood, customers sick of the highest tax on cigarettes in America are fighting back by rolling their own cigarettes out of pipe tobacco.
It's a way around New York City's sky high cigarette taxes, which have led to an 35 percent drop in smoking rates since 2002, according to Mayor Michael Bloomberg, from to 14 percent from 22 percent in 2002 when city anti-smoking initiatives.
Among New York City public school students the drop is sharper, down 52 percent since 2001, the New York City Department of Health says.
But while city residents may be healthier, the high taxes have fueled a black market in contraband cigarettes.
All over New York City, runners hawk untaxed, $5-a-pack smokes on city street corners. Newsstand owners pocket city and state taxes with each cheap pack. And Indian reservations flood the market with contraband cigarettes.
State law requires reservations sell cigarettes only to tribe members, but last year the smoke shops on the tiny Poospatuck Indian reservation on Long Island sold more than four million cartons. That would require every man, woman and child on the reservation to smoke 523 packs a day, the city charged in court papers last fall, complaining those cigarettes were being sold in New York City.
At Island Smokes, customers pay $3 a pack if they make a carton of cigarettes. By comparison, one pack of 20 cigarettes averages $11-$13 a pack in the city and can be as high as $15.
As he made his smokes, Lucky Strike smoker Christopher Geist recalled what led him here.
Heading north from Florida to join the Occupy Wall Street movement, his cigarette costs skyrocketed from $4.50 a pack in Florida to $6 in Washington D.C and to $8 in Philadelphia. By the time he reached Virginia, a friend warned him about New York City. "$14 a pack? Are you kidding me?," Geist responded.
Island Smokes is gaining ground fast and plans to expand into all five boroughs "imminently," said the company's lawyer, Jonathan Behrins, who defends the legality of the new operation which the city wants shut down.
"These guys do not manufacture cigarettes and it's the definition of manufacturing that's at issue," Behrins said.
The city takes a different view.
"If you take pipe tobacco and you roll paper around it, it's a cigarette," said senior city attorney Eric Proshansky.
But while the legality of Island Smokes' operation is in dispute, Geist himself is not breaking any laws.
The same can't be said for the bootleggers, bodega owners and even corrupt cops peddling black market cigarettes. The high price of cigarettes has prompted tales reminiscent of the prohibition days of the 1920s when alcohol was illegal.
Smugglers often drive truckloads of smokes into the city from cheaper outlets, such as Indian reservations where no sales tax is collected, and affix fake tax stamps on packs.
A recent General Accounting Office report calculated that a trip from Virginia to New York City with a single case of 12,000 cigarettes -- about what would fit in the trunk of the average car -- could net $3,000.
"It's astonishing how much revenue is being lost to the black market," said Scott Drenkard, an analyst with the Tax Foundation, a non-partisan think tank.
A Reuters reporter purchased three packs of Marlboros for $7.50 a pack at a Harlem deli on Wednesday. All three packs bore tax stamps from Virginia.
Joe Green, spokesman for the New York office of the Bureau of Alcohol, Tobacco and Firearms says untaxed cigarettes are not a victimless crime. He said tax revenue pays for education and other services and that stores selling contraband cigarettes put law-abiding stores out of business.
In August, Manhattan federal prosecutors charged a veteran NYPD detective with flashing his badge and robbing the home of an alleged Bronx cigarette smuggler of $7,000 cash and "bags of cartons of Newport" brand cigarettes, court documents show.
In May, 11 men were charged with conspiracy to distribute contraband cigarettes and $135,000 in cash and over 3,000 cartons were seized.
Back at Island Smokes, patron Zach Cheney said he pays $4 a pack in New Orleans. Asked if he came to Island Smokes for health or price reasons, he didn't hesitate. "Price reasons."
Editing by Mark Egan and Doina Chiacu