Littering in Harvest Moon: Back to Nature is a mechanic of the game not displayed in quantifiable means. Littering is throwing anything on the ground in the town or inside peoples homes. To throw trash out, there is a garbage bin in Town Square.
Anything thrown on the ground (trash, crops, flowers, etc) anywhere in the town or inside someones home (Gotz's house included) counts as littering. You cannot litter on the beach, Mother Hill, or your farm.
Littering will lower the villagers affection to you, as well as increase the amount of trash found when fishing. Exact affection value lost when littering is not known, however it cannot be undone, only gained back through gifts and other affection increasing tactics.
You are able to go to Church on afternoons and "confess" you littered, which will bring your litter count back to zero, but does not affect villager affection (only chance of trash being found is while fishing).