With prices of a pack hitting $15, many illegal solutions exist also

At Island Smokes on New York City's Lower East Side, 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 a 35 percent drop in smoking rates since 2002, when city anti-smoking initiatives began. according to Mayor Michael Bloomberg.

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 smoking less, the high taxes - which boost the cost of cigarettes to as high as $15 a pack - 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 that 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 4 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, illegally, in New York City.

At Island Smokes, customers pay $4.50 per pack if they make one pack of cigarettes; the price drops to $3 a pack if they make an entire carton of 10 packs. By comparison, one pack of 20 cigarettes averages $11 to $13 in the city and can be as high as $15.

Customers don't actually roll the cigarettes themselves but use a speedy "RYO" (Roll Your Own) machine that squirts the tobacco into a hollow paper-and-filter ensemble. A carton takes about half an hour to make.

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 and to $8 in Philadelphia. In Virginia, a friend warned him about New York City.

"Fourteen dollars a pack? Are you kidding me?," Geist responded.

Island Smokes is gaining ground fast and plans to expand into all five boroughs "imminently," said Jonathan Behrins, a lawyer for 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.

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.

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, federal prosecutors in Manhattan charged a veteran NYPD detective with flashing his badge and robbing the home of an alleged Bronx cigarette smuggler of $7,000 cash and 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 more than 3,000 cartons were seized.

Back at Island Smokes, the store boasts "natural" cigarettes free from many of the additives found in most commercial brands. Asked if he came there for health or price reasons, patron Zach Cheney didn't hesitate: "Price reasons."