Apple says it's to do with complying with tax regulations. I *think* it's to do with them not being able to claim tax deductions if they release the iPod touch firmware free, as the updates are perceived to be new versions of the software, creating new features (e.g. like a new operating system, or new version of Word etc).
However, you can download the firmware free if you google "ipod touch firmware". A site, the top one on my search result, allows you to download the firmware from Apple without paying for it. After downloading, you just hold down the Shift key and click the Update (to update your touch) or Restore (to wipe everything off your touch and do a clean install) button in iTunes.
Doing this is a grey area, but this method has existed for almost 2 years now and if Apple had wanted to, they would have shut down this method...either by having the site taken down or closing off their own servers better.