I contacted them and they replied as below:
Thank you for contacting the Google Play Team.
I see that your question is regarding accepting donations through
PayPal. Donations may only be collected within an app under certain
conditions:
Donations are only permitted for validated non-profit charitable organizations (for example, a validated 501(c)(3) charitable
organization or the local equivalent).
Donations must be facilitated via a web browser, and any collection must be made through a secure payment system.
If you belong to an eligible charitable organization, please follow
these steps:
Attach a copy of your organization’s IRS determination letter or other acceptable proof in your reply to this notification. The
provided information must indicate your status as a charitable
organization.
Ensure your app only facilitates donations via a web browser as specified above.
Submit your app for review.
Alternatively, if you are not a charitable organization, you must
remove the donation functionality from your app, or accept payment
through Google Play's in-app billing service or Paid app distribution
on the Play Store. You can learn more about in-app billing in our Help
Center: http://developer.android.com/google/play/billing/index.html
I hope this helps. Thank you for your support of Google Play.
Regards, Bruce The Google Play Team