Ben, were you ever able to solve this problem? I am receiving the exact same error message (Error: Invalid Merchant or Merchant doesn't exist!) when I attempt to check out with certain items in my cart.
Strangely, I only receive this error message when both of the following two conditions are met:
i) I have one of the two most expensive items that I sell on my site in the shopping cart, and
ii) The transaction is subject to sales tax.
If these two conditions are not met, the checkout process is completed perfectly w/ no issues from PayPal. I am using osC v2.3.3, PayPal Payments Advanced (Layout C), and PayPal Payflow as my payments module. When I spoke w/ a PayPal Integration representative, he said my site was not receiving a secure token from PayPal in the cases when I receive this error message, so something about two items I sell combined with sales tax being charged is causing a problem with the secure token being sent and received from PayPal.
I am of course happy to provide any additional information as needed. Thanks very much to anyone who can help me, and thanks to all the smart/helpful people on this forum who have allowed me to get this far!