Paypal states in their TOS that they do not allow "adult transactions", and that includes transactions involving adult traffic. If you read carefully, they also have the right to "fine" you $500 for using Paypal for "adult services".
They made the change when they were purchased by ebay about a year ago. EBay wanted to wash it hands of the adult business, and I also suspect that Paypal/Ebay were pressured by the credit card companies to take their stance.
Whatever the case, it's foolish to use Paypal for adult transactions, especially when there are so many other processors that welcome our business (eg. epassporte, moneybookers).
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