Google knows because wesite owners report each other like there is no tomorrow. I have seen these question alot in forums "Is this website breaking google TOS" and "should this website get reported". I do not sale links but what is the difference from selling a halfpage ad or 125 by 125 square than selling a link. Look at newspaper space..... they sale everthing you can imagine from 1 word to a wholepage.
doesn't *always* hurt serps/pr etc. if you are stupid and have a huge banner with your site name, put it up on text link ads... then it often happens (more just the visible pr removed than serps affected).
So far, most sites are only complaining about a loss of green in the toolbar, but Google warned that they will also penalize rankings in some cases. Google's paid detection algorithm is far from perfect. That's why back in dec, Googlers manually penalized sites instead of letting algorithms loose on autopilot.
yes google never recommend to sell links (paid links)... but after all every webmaster wants to earn few extra $$ ... So i suggest not to put up so many paid links on a single page...fews links are Ok.
Google has to right to think that you have paid links (courtesy of a few people trying to play around with the "report paid links" feature), and will not hesitate to nuke your PageRank to nothing. Though, search rankings are another thing... Google doesn't seem to have penalized webmasters in that area (yet) just for selling a few links. Besides, Google explicitly mentions that it WILL do something about paid links.