The good owners of the Barnacles Bar were determined to find a loophole that would let their nicotine-addicted clientele feed their deadly vice in peace. They found it:
There was a line in the law that said if you were an actor in a play, and your character smoked, then you'd get a pass. You know, like if you were doing a live stage show of the X-Files and you were playing the main bad guy. Thus, the owners of the bar declared that they were staging a continuous live performance and that everyone in the bar was an actor.
"Now can I f*****g smoke?"
The thing was, the law didn't bother to specify what was meant by "stage performances," and really, how do you argue? So what if they didn't have a script--there is such a thing as improv. So what if they weren't getting paid--the law didn't say only professional actors counted. So, you enter Barnacles on a Saturday night, and then see that the staff are in costume and that you have become a performer in their "Theater Night." Sure, you don't have any lines and you're probably just playing "Guy Drinking To Forget His Job #5," but, hey, you need to smoke to get into character.