Ok, this topic has mushroomed in the various blogs and forums, so I wanted to make sure no one missed it, and to add a comment of my own. If you have not yet heard (and I am sure you have) Jeremy Zawodny (Yahoo) is selling sponsored links on his blog. Big deal, right? Well, since Matt Cutts (Google) is spouting off that that is a bad bad thing to do, you can see how this could cause some heated arguments in the SEO world.
First off, you should read Jeremy's take on it at http://jeremy.zawodny.com/blog/archives/005874.html and http://jeremy.zawodny.com/blog/archives/005883.html. Then follow up that reading with Matt's response at http://www.mattcutts.com/blog/text-link-follow-up/.
You'll quickly be engrossed in the arguments from one and all. My take on it all?
I think the confusion stems from the fact that no one is certain whether Google is saying that the sponsored links will simply pass no link-love, or if they are saying that in addition to sponsored links not passing link-love, they will also penalize the seller's site in some way (i.e. reducing Zawodny's PR or making all links, even non-sponsored ones, worthless). I think that is the sticking point.
In my opinion, the link seller should suffer NO penalty of any sort, simply because he decides to monetize his site in some way. The site owner should not have to do anything (like place a nofollow on the links) in order to avoid a penalty. Many site owner's have never even heard of nofollow. If Google wants to prevent sold links from passing PR or link-love in any form, fine. No big deal. But the site owner who sold those links, should absolutely not have his site penalized. In all truth, Google has the right to penalize it if it wants. But should they? No. Positively not. It is just dumb to do so.
If Matt or Google would simply be slightly less Googlish (vague) and more clear in what they mean, they could probably stop all the arguments immediately. So what is it Matt? Does Zawodny's site deserve to be penalized for selling links? Will you do so? Or do you mean you will only prevent his sponsored links from passing link-love? Get everyone clear on that, and I think the issue will dissipate pretty quickly (or heat up, depending upon the answer).