Is all this the business of a Sheltie Rescue ? It's their "game" so to speak. If you want to adopt one of their dogs you have to do it by their rules. To me, this is the same as the fence issue...
I have to admit, I never heard of a rescue that would refuse to place a dog in a home with a smoker. My opinion is that the rescue makes the rules, and as far as I am concerned, they can choose to place dogs as they see fit.
On the other hand, I would have questions about an entity that would risk never being able to place a dog just because the potential adopter smoked. Rescues across the country are stuffed to the gills and begging for forever homes for animals. I'm not sure that I would agree that refusing a dog to a smoker is worth the risk of no home for the dog. Does the smoker only smoke outside? The rescue wouldn't really know this. I am not a smoker, but a rescue that held to a rule that I found over restrictive (even if it did not affect me) might cause me to look elsewhere for a companion. My thought would be, what other questionable decisions might they be indulging in?

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People come in to work all the time and bring back their clothes and it reaks of cigarette smoke. GROSS!