Freelance smugglers, organized crime and Internet sources are flooding New York's neighborhoods with cheap cigarettes that would bring the city and state upward of $200 million a year in taxes on the legitimate market.

With premium brands such as Marlboro going for $7.75 a pack in many stores throughout the five boroughs and cartons going for $70 and more, thousands of smokers have chosen to buy either smuggled smokes - or untaxed cigarettes from more than 144 Internet sites, which are legal but unregulated. The boom in underground cigarettes was touched off by the July 2 increase in city taxes to $1.50 per pack from 8 cents apack and a bump in state taxes to the same $1.50 per pack from $1.11, according to government officials and tobacco wholesalers. In July and August, 24.5 million fewer packs of legitimate cigarettes were sold in retail outlets throughout the city than in July and August last year, according to the city Finance Department. That's a drop of 41%. Smuggling to the city from lower-tax states such as Virginia (2.5 cents a pack total) generates tremendous profits for ringleaders - up to $25,000 for a day's work involving a van loaded with 2,500 cartons, said Edgar Domenech, special agent in charge for the federal Bureau of Alcohol, Tobacco and Firearms' regional field division. Untaxed cigarettes or cigarette packs with phony tax stamps are available in many neighborhood stores or on the street, where hawkers routinely peddle $50 cartons. "When it comes to smuggling and counterfeit stamps, traditional organized crime is involved, terrorist groups are involved and street gangs are involved," said John Dugan, the ATF's area supervisor for industry operations. "Now, the profit margin is tremendous," he said. 3 stores in 4 blocks One morning last week, three stores in a four-block area in Bedford-Stuyvesant, Brooklyn, were busted by agents of the Finance Department's tax enforcement division for selling untaxed cigarettes. The agents bought the cigarettes at Tony's Millennium grocery store, 269 Schenectady Ave.; the Peking restaurant, 249 Schenectady Ave., and Freddie's deli and grocery, four blocks away on St. Johns Place. "I don't know where they're from, I don't [know] anything about it," said Antonio Blas, a clerk at Tony's Millennium. Hewas answering the investigators' questions as they searched his store. Blas said that sales of cigarettes of any kind were "way down" because of street hawkers. "They're right outside the store, up the block, selling out of their trunks, saying, 'Hey, man, $5, $5 a pack,' so people are not coming in here to buy," he said. 'I work here, not owner' At Freddie's deli, Faiz Saleh Al-Qah, the clerk behind the counter, shook his head and in broken English told investigators he had no idea what they were talking about when they confronted him with the untaxed packs. "I work here, not owner," Al-Qah said. And at the Peking restaurant, investigators arrested the owner after finding 10 cartons of untaxed cigarettes hidden in barrels and under counters. City Finance Commissioner Martha Stark said her investigators are spot-checking stores on a continuing basis. "We are enforcing the regulations," she said. City officials argued the tax increase was necessary to help close the $5 billion budget gap and to deter smoking. "This tax increase is more about saving lives - mostly about saving young lives - than it is about revenues, for if we collect $100 million a year in cigarette tax revenues, that really is not significant considering that our estimate for total tax collections is $14 billion for the year," Stark said. Even though fewer packs of cigarettes are being sold, she said, revenues have increased because of the tax hike. This July, cigarette revenues for the city were $12.3 million, Stark said, while in July 2001, the revenues were $2.3 million. Wholesalers said that figure doesn't take into account the lost revenues to the city and state from other taxes, including $15 a carton in state taxes, and an additional $5.60 in taxes shared by the state and city. "This new tax is negative revenue producing. The city and state will have a net loss of $250million a year," said Leonard Schwartz, president of Globe Wholesale Tobacco Co. and chairman of the Tobacco Association of the State of New York. "Thirty-five million cartons were sold in the city last [fiscal] year; they're going to lose 18 million cartons," he said, predicting that legitimate cigarette sales would drop further in the coming months. Whatever their differences over tax revenue collections, Schwartz, Stark and law enforcement agencies all agree on one point: The city is awash in black market cigarettes. But the Finance Department has only 16 investigators to patrol 13,000 retail stores licensed to sell cigarettes in the city, and those investigators also enforce other tax regulations. Additionally, enforcement of city, state and federal laws on cigarettes is spotty, at best, in part because the ATF and the FBI, which is also responsible for tobacco regulations, give the issue a low priority. Locally, few black market cigarette and phony tax stamp cases have been prosecuted. So the smugglers have nearly free rein, inspired as well by maximum federal sentences of six months in jail and/or a $1,000 fine. They have to be caught with a minimum of 300 cartons in order to be prosecuted. Web unregulated As for the Internet sales, the Web is entirely unregulated. A recent U.S. General Accounting Office report said untaxed Internet sales of cigarettes will reach $5 billion nationwide by 2005, and states "will lose about $1.4 billion from those sales." Nearly all the 47 New York State Internet sales sites are run by Native Americans whose operations are not taxed under federal law, and who pass those savings on to consumers. Premium brands are available at $28 to $33 a carton. In theory, the buyer is supposed to pay city and state sales taxes on purchases of more than two cartons. "But nobody is enforcing that; it's impossible to enforce, although we'd like to," Stark said. A law banning untaxed Internet cigarette sales in New York was declared unconstitutional after a challenge by Brown & Williamson Tobacco and Santa Fe Natural Tobacco Co., a Native American brand. A Manhattan federal judge ruled that only the federal government has the right to regulate interstate commerce.

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