Actually, PayPal deals with porn, just not digital porn.
If you sell porn in DVD, like Adam & Eve does, then PayPal is happy to take your money.
But, if you sell porn in digital download, PayPal doesn't want that business. It's easy for someone to steal credit cards. When you ship a DVD, there is a physical address you can trace; but when it's just digital download, by the time you know the thief has hit, he's long gone.
sauce from forum.digitalpoint.com