Speaking as a photo lab technician, I can honestly say that this is the dumbest thing I have EVER heard. I see this kind of thing all the time, and while I have vowed to never take naked bath photos of my own children (when I eventually have them), the fact is, this is very common. I can't stand developing them though... It just makes me uncomfortable.
If I took all of the 'naked bathtime' photos I've had to process to the police, half of the parents in my city would be in prison awaiting their trial for child pornography.
When dealing with photos like the those mentioned by the OP, there are some things to consider when deciding whether or not they are appropriate and should/should not be processed.
1. What is the situation? - Most likely if kids are taking a bath, they won't be wearing anything, and as long as they are young enough, it's plausible. Just as long as the situation does not appear to be artificial and created specifically for the photo, it's usually ok.
2. Are the subjects of the photo protesting? - If they are complaining, that could mean the photo should not have been taken. If the subject is attempting to 'cover up' then that would raise a flag in my mind. Then again, young kids sometimes hate to have their picture taken.
3. How old are the children? - If they are young enough, it's usually just considered, "Being a parent." If the children appear to be old enough to know better, then it may get ugly for whoever submitted the photos. 5 may be pushing it though. I wouldn't process anything of a 5 year old. Then again, I do not know the content of the photos.
4. Finally, are the subjects touching, or is anything/anyone touching them? - It is usually not considered pornography unless someone is being touched. Most photo labs will process all of the naked photos one can being them as long as there is nothing touching the model, and if the model is at least 18.
I have never actually discussed a minimum age with my supervisor, and I suppose I will raise the question today.
On a side note, why would anyone ever go t Wal-Mart for photo processing? If there is somewhere else available to go, go there! Wal-Mart will hire anyone, and they have given me plenty of trouble in the past. Now that I work in lab with a competent staff, I know for a fact that Wal-Mart is inferrior. I'm also not a fan of their Fuji machines. Noritsu machines are better.
And that, my friends, is the situation from the eyes of a photo lab technician.