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Try processing payment for trade in anything that is "inappropriate" or "illegal" via a conventional bank and you will have the authorities banging on your front door without warning. Paypal is intitle to have it's own standards, much as the big banks have. If its standards vary from Smashwords, then sobeit.
Smashwords is a very automated process, perhaps Paypal are just the people to draw their attention to the fact that they should employ a better screening process than key word searches. It's not about censorship, it's about crossing a line, and everyone is entitled to their own oppinion on where that line is, especially in business.
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