Vance used a speech at the Munich Security Conference last week to launch a full-frontal attack on European regulation, warning that free speech was "in retreat" across the continent.
Overzealous censorship was a bigger threat to Europe than Russian or Chinese military aggression, he said.
On Monday, he doubled down on his accusations as he responded to an interview conducted by US broadcaster CBS with prosecutors from Germany's Central Office for Combating Hate Crime on the Internet (ZHIN).
In the clip shared by Vance, German officials told a journalist from the 60 Minutes news programme that "insulting" someone on the internet is a crime in Germany, as is spreading malicious gossip and threats.
Writing on social media platform X, Vance said the policy was "Orwellian, and everyone in Europe and the US must reject this lunacy".
"Insulting someone is not a crime, and criminalizing speech is going to put real strain on European-US relationships," Vance said.
The justice ministry in the German region of Lower Saxony, which oversees ZHIN, said fighting online hate remained a "key concern" for authorities.
"Crimes related to digital hate must be consistently prosecuted and the perpetrators punished," a spokesman for the ministry said.
"The internet is not a lawless space - and must never become one."
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Online hate speech was "an acute danger to our free, democratic society", the spokesman said.
At the same time, free speech remained a "valuable good", which was "rightly protected in the German constitution".
The pushback against Vance's warnings on free speech also came from German President Frank-Walter Steinmeier.
Vance's speech in Munich "made us doubt whether we are still singing from the same sheet when it comes to the future of democracy", Steinmeier said at an event with the Moldovan president Thursday.
"I am extremely concerned when this small elite not only redefines the rules of liberal democracy for their own country, but also supports forces in Germany that despise the institutions of democracy," Steinmeier said.
Vance, as well as key ally of US President Donald Trump and X owner Elon Musk, have voiced support for the far-right AfD party in Germany ahead of this weekend's election.
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