There's a difference between "don't use Google" and "don't use Google for business."
A story like this turns me off Google in a big way if I'm using them for anything at all commercial. I don't want to have to worry about the stuff I'm doing. The idea of Google Checkout is to make my life easier. They're failing that in a big way.
It's not even a lack of trust of Google. I think Google's a good company that's just stupid in some ways. It's more a matter of, I don't want to bother with that stuff. I'll find somebody easier.
A commercial relationship is (or should be??) "higher touch" then a consumer one - but google don't want that at all. So that alone makes commercial usage a risk.
Unless and until you're bringing in real money for Google, make no mistake: you're in a consumer relationship with them, not a commercial one.
A merchant that's sold a few hundred dollars worth of stuff is never going to be important enough to Google to bother putting a real person on. It may suck, but that's the way it is.
If the vendor in question had a few more zeroes on their sales figures, Google would make sure that the complaints were valid before shutting them down.
But I agree fully with the basic point - any small vendor should think twice before relying solely on Google Checkout.