Due to the new tax laws that were passed along with the Obamacare bill, Paypal is now required to report all payments over 20,000 per year to the IRS, or report all accounts doing over 200 transactions/year. To do that, they need a tax number from you that id's you to the IRS.
If you don't feel like giving them your SSN#, you can easily apply for and get/use a TID (taxpayer ID number). It's a simple form that you fill out for the IRS, and they issue it for you.
If you're operating a business of any sort, it's a good idea to get a TID and give that to entities you're doing business with instead of your SSN. Any wholesaler you're doing business with will require you to have a TID, so you can buy your supplies and/or resale goods without having to pay retail sales tax on it at the wholesale level.