PayPal is just a payment service. It has nothing to do with supplying the product, whether physical or digital. That's up to you.
There are various ways you can sell digital goods. You could, for example, install some software on your website that interacts with PayPal and sends a special email to customers with product download links. An example of this is LinkLok.
Another, simpler option is to use a 3rd party service like [FastSpring or [URL="http://www.e-junkie.com/"]eJunkie](http://www.fastspring.com/).