They could, or they could list guns for sale on a classifieds site like Armslist and meet in private. People could use Paypal for such a transaction regardless of the terms of use, though trying to use the dispute resolution might result in both parties losing their accounts.

In any case, it's not a meaningful financial risk for Paypal. It might be a risk of bad press, but "criminal pays for gun with Paypal and uses it to commit a murder" probably isn't actually going to result in many people not using Paypal.