This one is a pain in the butt without very high Sneak, Security, or Speechcraft scores.

I just gave up, and supplied Sugar-Lips with artifacts scavenged from various ruins.

But I wanted to loot the smuggler's den under Fatleg's Drop Off. They are smugglers, right? Well, I guess not, as attacking them is a crime. How it is that they alert the guards above ground remains a mystery.

Again, I don't see any of this as possible without really those high scores mentioned above.

What am I missing here?

I always just grab something from a chest and kill him when he attacks me. I think he's got a key on him.

Believe me there is nothing worth to loot in those crates! But talk to Relam Arinith, accept to deliver the slave Rabinna to Balmora, listen to Rabinna, accept to help her, then bribe, taunt, admire etc. to force him to attack you and kill him. Then go to Balmore and kill Vorar Helas as soon as you enter, as he is attacking... Then bring Rabinna to Ebonheart in the Argonian Mission. You'll receive 400 gold...

If you're having trouble with the quest, go do some jobs for other members of the Guild.
Not only will you level-up your skills, you'll likely find some Chameleon potions or something else handy along the way.

It is against the law to initiate combat at any time; even if it's a criminal.

Typically one would either taunt the smuggler in to combat, or if a mage type you can use Frenzy Humanoid. Or, as stated above, you can go practice the skills needed to do things the stealthy way.

As the rumer and secrets topics tell you right from the start in Seyda Neen, if someone attcks you first you have the right to defend yourself. If not, then attacking them first is a crime, regardless of thier criminal status.