active_merchant.rb

if Rails.env.production?
  PAYPAL_ACCOUNT = 'production@gmail.com'
else
  PAYPAL_ACCOUNT = 'development@gmail.com'
  ActiveMerchant::Billing::Base.mode = :test
end

create.html.erb

<% payment_service_for @item_number, PAYPAL_ACCOUNT, :amount => @amount, :currency => @currency, :service => :paypal do |service|
	service.customer :first_name => @user.first_name, :last_name => @user.last_name, :phone => @user.phone, :email => @user.email
	service.billing_address :city => @user.city, :address1 => @user.address1, :state => @user.state, :country => @user.country, :zip => @user.zip
	service.item_name "Testing IPN"
	service.invoice @invoice
	service.tax "0.00"
	service.return_url url_for(:only_path => false, :controller => 'pay_pal',:action => 'show')
	service.cancel_return_url url_for(:only_path => false, :controller => 'pay_pal', :action => 'cancel') %>
	<%= submit_tag 'Make Payment'%>
<% end %>

paypal_controller.rb

require 'ostruct'

class PayPalController < ApplicationController
  #include active merchant billing
  include ActiveMerchant::Billing::Integrations
  
  def create
    #create a user object, not required, but ideally this is shown as a demonstration of the user data that comes
    #from your database
    _user = {:first_name => "saran", :last_name => "v", :email => "some_per@gmail.com", :address1 => "awesome ln", :city => "Austin", :state => "TX", :zip => "78759", :country => "USA", :phone => "5120070070" }
    
    #using openstruct to access the hash by a dot notation
    @user = OpenStruct.new _user
    @amount = "0.01"
    @currency = "USD"

    #a random invoice number for test. 
    @invoice = Integer rand(1000)
    #this will also come from your product database
    @item_number = "123"

  end
  
  def notify
    #handle notification here. You can use this response
    #to update your database, etc.
    #for now lets print the notification raw response
    notify = Paypal::Notification.new(request.raw_post)
    p "Notification object is #{notify}"
    if notify.acknowledge
      p "Transaction ID is #{notify.transaction_id}"
      p "Notification object is #{notify}"
      p "Notification status is #{notify.status}"
    end
    render :nothing => true
  end
  
  def show
    #gets redirected here when the transaction is successful
  end
  
end