For five months, the drab, yellow warehouse off George Washington Highway did a booming business, drawing customers from 350 miles away in New York City. The customers always paid in cash, which they carried in brown paper bags.

Among them were men said to be known simply as "Joey Legs," "O. B." and "Tony." The men who ran the warehouse say that everyone wanted the same thing: low-tax cigarettes trucked across the nearby state line from North Carolina.

Business was so brisk (8,000 cartons a week) that the warehouse couldn't keep its shelves stocked.

What the customers didn't know was that the business was being operated by law enforcement agents who were video-taping the transactions for what was one of the biggest arrests to date in the federal government's 16-month-old war against a multimillion-dollar-a-year cigarette smuggling racket called buttlegging.

Because the North Carolina tax on cigarettes is the lowest in the nation and New York City's the highest, just one carton translates to a profit of $1.30.

Over the years, smugglers, running tractor-trailer loads of cigarettes up i-95 -- "Tobacco Road" to the feds -- have cheated taxpayers out of as much as $390 million a year and left a trail of violence. Smuggling has been linked to 12 murders and uncounted beatings, hijackings, truck bombings and robberies, law enforcement authorities say.

With the bust at the yellow warehouse here and the new federal role in monitoring large cigarette sales, authorities say they are beginning to choke off smuggling at its source.

"This is our most significant cigarette investigation ever," says Ed Hughes, special agent in charge of cigarette investigations for the federal Bureau of Alcohol, Tobacco and Firearms. Hughes said the smuggling ring linked to the arrests here was under the leadership of Joseph (Joey Legs) Legrano, a reputed lieutenant in the Columbo crime family of New York. In the last two years the ring created tax losses in New York amounting to $2.5 million, Hughes said.

Testimony to the effectiveness of the new federal presence comes from some of the people once active in the trade.

Mack Judge, a raspy-voiced man who for 10 years ran a wholesale cigarette warehouse out of an old Ford showroom just south of the Virginia line, says a new federal law scared him off last spring. At one time, Judge was selling more than 8 million cartons of cigarettes a year. His customers were often broad-shouldered men with Brooklyn accents who pulled up to Judge's warehouse in Weldon, N.C., in large, unmarked trucks. The warehouse now appears abandoned; weeds have sprung up in driveways where trucks used to back up to load cigarettes.

"I didn't want no problems, so I got out," says Judge, who at the age of 57 has retired. If Judge had continued his business, he could have committed a federal offense punishable by five years in jail and a $100,000 fine.

The sharp differences in state and local cigarette taxes -- a difference that a federal study says made cigarette smuggling a $1.5 billion-a-year business in 1975 -- continues to exist.North Carolina charges just 2 cents a pack and Virginia 2.5 cents, compared to 21 cents a pack in Pennsylvania, Massachusetts, Florida and Connecticut. New York City imposes an 8-cent tax on top of the state 15-cent tax for a national high of 23 cents.

New York, which pressured Congress to pass the bootlegging law in 1978 because of cigarette losses of up to $72 million a year, saw cigarette tax revenues jump by $7.2 million in the 11 months after the law went into effect.

North Carolina, which for years had been the beneficiary of smugglers bearing large suitcases full of cash, has recorded a sharp decline in cigarette sales. Cigarette tax revenue in the state for the first four months of this year is off by 6.75 percent compared to revenue in the first four months of 1978, which was before passage of the federal law.

"We got a very definite lack of anxiety after the passage of that law," says Gary Griffith, a supervisor in the North Carolina Bureau of Investigation. "You don't see the tractor trailers pulling up to the warehouses. They [the warehouse operators] have opted not to get involved."

Before the federal law, it was legal for a North Cigarette wholesaler to sell unlimited quantities of cigarettes, even if he knew they were going to be trucked north by interstate smugglers.

Now, the law requires that all sales of more than 299 cartons of cigarettes be recorded on ledgers that detail who bought the cigarettes and where they will be shipped.

"Cigarettes sure slowed down for me," says Jeff Frazier, owner of Frazier's Drive-In in Weldon. Frazier, 23, who says he grew up loading cases of cigarettes in out-of-state trucks, says the federal law is hurting the area's economy.

"Since they got that 299 limit," Frazier says, "it's hurting the whole state of North Carolina. It's terrible."

Before the federal law, it was largely revenue commissioners and law enforcement officials in states with high cigarette taxes who believed the situation terrible.

ATF agents in the Chesapeake warehouse sting say all five of the major New York crime families have been involved within the last five years in cigarette smuggling operations based in North Carolina and Virginia. Their profits on one large truck of North Carolina cigarettes sold in New York City can amount to more than $100,000, ATF agents say.

The alleged smuggling ring broken up last week was making a profit of about $1.30 a carton selling up to 8,000 cartons a week, ATF agents say. Legrano and Vincent (Jimmy) Gati, its accused leaders, allegedly made each about $2,000 a week from the operation, ATF agents say.Both men have pleaded innocent to federal racketeering charges.

The "buttlegging" operation, which distributed cigarettes throughout Brooklyn at prices about $1.10 cheaper than legitimately taxed cigarettes, had little of the intrigue or exotic dealings normally associated with high-stakes smuggling, according to federal and New York authorities.

Wearing jeans and an old T-shirt, ATF undercover agent William M. Hamilton made frequent deliveries last fall from the Chesapeake warehouse to the parking lot of a Holiday Inn on Staten Island.

Some of the cigarettes from Chesapeake allegedly were delivered to banks and beauty shops by Rose Desio, a 58-year-old woman who walked through Brooklyn carrying cartons of cigarettes in brown grocery bags, according to Alfred Donati Jr., deputy commissioner for special investigations in the New York State Tax Department. Desio was charged last week with violating New York tax laws and has pleaded innocent.

Legrano and Gati have been running cigarette operations for 18 years, according to ATF agents. Legrano, 38, was convicted five years ago of trying to bribe a New York tax agent who had caught him with 4,000 cartons of contraband cigarettes and has no record of legitimate employment, according to Assistant U.S. Attorney Nash W. Schott of Alexandria.Gati, 50, has a long record of cigarette smuggling violations.

On Tuesday, in U.S. District Court in Norfolk, Schott argued that Legrano, who faces 115 years in prison and $857,000 in fines on 17 different federal charges, should not have been freed under a $250,000 property bond.

"The danger of flight is present at this time," Nash claimed. The bond was allowed to stand and Legrano, who lives in Staten Island, left the courthouse Tuesday in a Buick bearing Florida license plates.

Legrano is charged with wire fraud, trafficking contraband cigarettes and conspiracy. He also is charged with violating the RICO statute, the federal Racketeer Influenced Corrupt Organization Act.

When Legrano was arrested in Staten Island last week, state and federal agents enumerated the charges against him, mentioning the RICO statute. According to those who arrested him. Legrano's only comment was: "Who's this guy Rico?"