The issue is with your PayPal account rather than the addon. I think PayPal has specific rules on receiving payments as donations as it is meant for things like charities and non-profit organisations because it would incur a smaller fee. You will need to just keep that option disabled.
There's a semantic difference between what we're referring to as "donations" (which is just your users paying you some money) vs what PayPal considers to be a donation vs a regular purchase. It treats them as a specific type of payment basically, if that option is passed through. So as your PayPal account is not eligible to receive what PayPal sees as donations, they'll need to be treated as regular payments.