I recall being able to steal an item from someones bag even if it was inside another bag. but whenever i attempt i get the msg (you cannot steal that). verdict?
If you mean that you should be able to snoop into a bag within a bag and then target steal an item inside it, yes. Back when I played on OSI some people took thief protection to the extreme and had many layers of bags covered with cloth. Didn't help; I'd drag away the top level items rapidly until the image disappeared and left the bags there for snooping. I never tried to random steal from a bag within a bag though so if that's what you're asking about I don't know the answer.
Could be related to some recent changes to the stealing skill. We will look into this. You should be able to steal items in a bag, however I do not think random steals target anything other than items in the base backpack.