Sheffield Trading Standards teamed up with South Yorkshire Police last week to swoop on the garage near the city centre, where the counterfeit tobacco was reportedly being sold.
They seized 57,940 cigarettes and 398 pouches (8kg) of unlawful hand rolling tobacco, all of which was unlawful.
Search warrants were secured after an investigation found evidence that suspected counterfeit tobacco was being sold from the garage but stored in a van parked nearby.
The employees at the garage were arrested and a third is due to be questioned.
Sheffield Council said the operation showed it was serious about protecting people in the city from counterfeit goods, which pose a serious health risk.
Councillor Lewis Dagnall, cabinet member for environment and street scene, said: “We continue to be vigilant in our role of prevention and protection, against organised crime in the city.
“Unauthorised products pose a serious health risk, particularly to children, who are often more likely to buy these products.
“The role of our trading standards service and the effective partnership working with South Yorkshire Police is essential in preventing these illegal traders from operating in our city.
“This case is the biggest seizure we’ve seen in a long time, so I’m pleased that we have put a stop to these people who have no regard for the effect their illegal trade has on people’s health.”
The raid was carried out in liaison with the recently formed operation Fortify group which aims to disrupt serious and organised crime.
Each week in Sheffield there are 16 smoking related deaths, and five children start smoking every day in the city.
Illicit cigarettes are priced at just £4.50 per pack on average, according to the council, which is in line with 1980s prices, making them more affordable for children to buy with their pocket money and become addicted at a young age.
The latest raid means Sheffield Trading Standards has now seized 190,000 cigarettes, 116kg of loose tobacco and hundreds of thousands of counterfeit tobacco pouches in the last year.
Those caught selling illicit tobacco risk prison sentences, fines and losing their alcohol licences.
If you suspect tobacco is being sold illegally, you can call Consumer Direct on 0345 4040 506 or email [email protected]
For help to quit smoking, visit www.smokefreesheffield.org.