A spokeswoman for the payment processing giant told StartupSmart: "We are investigating whether this breaches our acceptable use policy. I can't say when a decision will be made, but it's likely to be within the next few days."
Under PayPal's acceptable use policy, websites are prohibited from using the payment service if they are involved in "items that promote hate, violence, racial intolerance, or the financial exploitation of a crime."
Critics of RedBubble's continued listing of Hipster Hitler work claim that they have complained to several of the site's partners, including PayPal and TerreNap, RedBubble's US-based server.
A post by a RedBubble member claims that TerreNap is also conducting an investigation into the content listed on RedBubble, although this has yet to be confirmed by the company.
Hosking tells StartupSmart: "As far as I am aware PayPal and TerreNap see no merit in the complaints.
"I understand that Paypal had looked at the issue previously and dismissed it, as has Facebook. The people who really matter here are the peak Jewish groups who have the experience and understanding to really consider these issues. (They are) in consultation with us.
"I can imagine that large organisations like PayPal and TerreNap are regularly dealing with people who would want to shut down other sites for hosting material they disagree with."
As reported by StartupSmart earlier this week, RedBubble parted ways with its law firm, Arnold Bloch Leibler, after becoming embroiled in prolonged clashes with a small number of its 400,000 user base unhappy over the continued sale of Hipster Hitler through the site.
Hipster Hitler is a US-based online comic that seeks to "parody" the Nazi dictator by depicting him as a Brooklyn hipster. T-shirts available on RedBubble include slogans such as 'Back to the Fuhrer', '1941: A Race Odyssey' and 'Eastside Westside Genocide.'
A Facebook group has been set up in protest at the sale of Hipster Hitler, with some dissident RedBubble users also disgruntled over children's t-shirts that depict, they claim, inappropriate images, such as serial killer Charles Manson.
While Hosking told StartupSmart that "tens" of users have left the site in protest, the dissidents claim that the number is in the "hundreds".
A RedBubble blog listing artists who have supposedly left suggests the number lies somewhere between the two.
Opponents of the Hipster Hitler products also claim that RedBubble has used heavy-handed moderation, and even the deletion of accounts, when concerns were raised.
A user of the site who contacted StartupSmart says: "This is one of the reasons why RedBubble's actions are disgusting – freedom of speech certainly isn't equally applied."
"Although my account has been suspended and I cannot access it anymore, RedBubble is still selling my work and profiting from it."
Amid claim and counter-claim, however, several RedBubble members have claimed that the dissidents are a "small core group" who "bully" other artists and do not support freedom of creative expression.
One who spoke to StartupSmart anonymously says: "The vast majority of users aren't aware of Hipster Hitler and most of the ones who are don't care about it."
"The concerns of the 'anti' group are legitimate, but their tactics are so bad. Most of the people on RedBubble are lovely, but they are being bullied and having their livelihoods damaged by a small, core group."
Another says: "Martin Hosking and RedBubble have behaved nothing short of Ghandi like through this, still allowed free speech, unless it went against their play nice policy."
It has also emerged that RedBubble is the only site that sells Hipster Hitler after rival t-shirt retailer Zazzle decided to block the products from its inventory.
In a statement emailed to StartupSmart, the New York artists behind Hipster Hitler say: "Zazzle did not allow our products because of the name Hitler in our username."
"RedBubble has been great in handling all of this and they have worldwide shipping so it didn't bother us that we're not making much of the sale of each t-shirt as it allows us to concentrate on our work."
"We have never had any intention of offending the Jewish community and have always made our position clear that we are parodying and satirising a very important period in history, the concentration of power in the hands of a few and the events that took place."
"We have always maintained this tone and refrained from making fun of the victims of the Holocaust."
Hosking adds: "No accounts have been arbitrarily deleted. People who cannot behave in a civilised manner on the site and engage in repeated personal attacks, harassment and vilification have had their accounts deleted after going through the above steps (warning, suspension then deletion)."
Hosking says that the Anti-Defamation Council, with which RedBubble has been in talks with following the departure of the site's legal team, is "taking time to consider the issues" before announcing its stance.
This article first appeared on StartupSmart, Australia's top site for start-up entrepreneurs.
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