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And the author was willing to push a mandatory update that disabled the PayPal IAP.

The other crappy thing is, even if the developer has a working version on another app store, there's no way (under the terms) to say "Sorry, you can't do that here, but here's a link to a version of the app that does allow it". I think even mentioning Amazon's app store ("you can also download this app in the Amazon app store", for instance) would be enough to get you banned.

I think you're missing the point. Google is god. You either follow the TOS or get booted eventually, if or when they find out.