In March of 2008 a group of us formed a "Pennsylvania Not for Profit" Corporation. Then I got a flood of learning from the state, the IRS, PayPal and everybody else. It cost us about $2500 for the Incorporation and 501c3 Tax Exempt Status. But you can't purchase 501c3 status, no matter what you are up to. There are organizations like Churches, Schools and Hospital which have other Federal Non-Profit status. But let me get to the point...
State non-profit incorporation does not make you a non-profit organization in the eyes of the IRS.
You must apply to the IRS for Federal Non-Profit status.
It does take about 4 or so months, depending on budget cuts to get this processed, and you will probably be questioned on what you're up to.
eBay and its financial arm PayPal are are subject to lots of people attempting scams. There are many people claiming to be "Non-Profit" who have no non-profit credentials from the IRS, the only recognized grantor for non-profit exemption from paying taxes.
Therefore when you claim you are a non-profit it means something very specific to eBay and PayPal... a Federally accredited 501c3 charitible organization (or one of the other accredited variants.) They are strict about this because after every earthquake, flood, tsunami, war, orphanage or whatever appear in the news, there are scammers rushing to sell things on eBay or collect money via PayPal for their cause. Sometimes it goes for the proper purpose, and often it doesn't.
There is a difference between a non-profit and an entity that does not make a profit. I believe (talk to the tax guy in your class) that if you do not distribute the reunion funds collected, and they remain in the bank (or a cookie jar) they do not have to be reported to the IRS, but that may be very wrong advice - especially for some of you folks who have classes of 1,000 or more and collect $100 from each attendee. Also if you collect $100,000 and spend $100,000 there is no profit to pay tax on. There are other issues, though. Everyone needs to understand that their contributions are not tax deductible for them (which your 501c3 status would grant.)
But if it's like my class, about 50 attendees at $10 a head, I don't think the IRS is going to care either way, unless you're cheating on something else. After all, they forgave Timothy Geithner.
So the bottom line, like someone else suggested, when you set up your PayPal account, say you provide a service, not that you are a non-profit.
Much less painful in the end.
George Graves
been there, done that

P.S. In Pennsylvania being a 501c3 Organization exempt from paying Federal taxes does not make you exempt for state sales taxes. Both organizations I work with, a global Non-Governmental Organization with offices in New York, Washington, Philadelphia and New Zealand, and the tiny Religious information service each have to pay sales tax in Pennsylvania. The tax man is ever-present.

Thank you for this information. I was very helpful.

Thank you George. That gives me a much better, and I hope, more realistic perspective when I chat with the IRS and PayPal tomorrow.

Well, I talked to someone at PayPal and explained the situation. Appearently the problem stems from the difference between 'non-profit' and 'not for profit'. The proper selection would have been 'not for profit', but the problem is that PayPal doesn't have that selection available!? The person I talked to had me fill out and send the following email;
'When I was setting up this
account I did not see a "not for profit" choice and selected
"non-profit" by mistake. All we are doing is setting up our ## Year
high school reunion, see our web site, www.claremont##.com'
He said it would take 3-5 days to remove the restriction. In the meantime the classmates could continue buying the tickets.

Thanks for the info. I am not so diplomatic so we took the beast head on. We were not granted full access until we got our 501c3 status, but you have "cracked the code."
Thanks for sharing that for everyone.

I am wondering if our site can take donations through paypal if we are not tax exempted or a nonprofit organization?

After getting an email from PayPal concerning this problem I called PayPal. I talked to a gentleman and told him this was our class reunion fund he determined that we did not have a problem and do not need either a 501c3 tax exempt status or to be incorperated and all was well.