I've had fellow merchants have their accounts siezed for it (and several thousand dollars in it) because depending on state/province you're in, it can be considered criminal fraud.
The key word here is "merchants", as in commercial businesses, and not individual personal transactions. I've used this for paying for, and being paid for various small personal transactions.
As mentioned elsewhere, this method is intended for "personal" payments, (owed money, money transfers, living expenses, gifts, etc) and not for dealing with commercial businesses or e-bay transactions. Also, it is not meant to be used (or abused) for paying large sums on a recurrent basis. (such as paying rent or lease payments) It is intended to be an occasional convenience, and not a means of circumventing the fees on a repetitive basis.
If they (Pay Pal) didn't want this method to be used, they would not have made it available.
For an example, it would be OK to use it to purchase one of SorenJ's orSal's amplifiers (presuming that he does not have a commercial or e-bay "store" account), but not OK to purchase one of Shannon's or Gregg's boards, as they have commercial / store Pay Pal accounts.
/ed B
