Hope this helps, This is a direct repsonse from the Paypal Risk team yesterday.
"Yes, it is permissible for US sellers to sell adult toys and novelties. The prohibited category is primarily the sale of adult digital goods, e.g. memberships to adult sites, digital photos or video, streaming adult movies, cam shows, etc.
If you have any further questions, please contact the PayPal Brand Risk Management Department at [email protected].
Sincerely,
Daniel
PayPal, Brand Risk Management
PayPal, an eBay Company"
I called them after this email to confirm the thinking, and it boils down to , if you can ship it as in a actually tangible product you can sell it.. if it is anything digital then no.