The investigation stems from consumer complaints that PayPal wasn't giving its customers the same caliber of fraud protection as typical credit card companies. PayPal currently has 25 million subscribers.
Charges lodged against the payment service include "misrepresenting the rights of account holders when an affiliated merchant fails to deliver merchandise." PayPal's fine is based on a fine-print policy in which the payment service charged customers for cancelled purchases.
Spitzer settled a similar charge against American Express and Discover Card last year when he ordered them to issue chargeback credits to consumers who did not receive goods ordered through a PayPal merchant.
PayPal claims that its chargeback ratio is only at one and a half percent, but that it frequently gets caught in the middle of disputes between buyers and sellers.
PayPal terminated the majority of its contracts with adult entertainment companies in August of last year for similar reasons.
At the request of Spitzer, PayPal will revise its consumer policy in addition to paying the $150,000 penalty.
The Federal Trade Commission is also investigating PayPal for its practice of freezing customer accounts based on alleged "suspicious transactions."
Consumers have complained in large numbers that PayPal does not process complaints efficiently and that it very often takes sides with the consumer by freezing account holder's money for up to six months when transactions go awry.
According to representatives for PayPal, accounts are frozen only until money from the broken transaction can be recovered.
EBay has reportedly addressed the issue with the FTC and an official investigation is not yet underway.