Quoted from Aurich:

I'm not a lawyer or an accountant, this isn't legal advice, blah blah. But I can tell you what I do.
I take money via Paypal, haven't had a single person try and screw me or anything. I've refunded a couple payments for various reasons (some were my fault) and that's painless. I've heard the nightmare stories, but my experience is the pinball collector community is full of solid people, haven't run into a bad egg yet.
I will say though that Paypal can be tricky, if they notice a sudden spike of money coming into your account they can lock it down, demand to know what you're selling, who your supplier is, proof that you're shipping it, etc. I had to deal with that. First person I talked to wasn't helpful, second one when I explained it was just hobby stuff on a forum totally got it and bypassed the BS, just asked for shipping numbers so they could see I was actually sending people what they paid for. Once I provided that my account was unlocked, no problems since. Something to keep in mind.
I report all my earnings to the IRS and pay taxes on them. I deduct all my expenses from that, the cost of printing, shipping, buying boxes and labels, supplies for prototyping etc.
Technically Paypal won't report anything to the IRS as long as you bring in under $20,000 a year, but I believe in keeping everything above board and legit. My books aren't necessarily organized, but I really do pay all my taxes, and I'd survive an audit (I hope I never have to test that!)
I'm already incorporated, so I just report the earnings as part of my corporate profit, my CPA handles all that. I don't know what your situation is, if you're filing under self employed income there's some crap you have to deal with, but it's not that hard, I did that for years before I got serious enough to incorporate. Not for pinball mods, my design company, just to be clear.
My real advice though? Charge as much as you need to. Don't worry about the price. If it's too much money for some people they can not buy it. I definitely don't look to gouge anyone on my projects, I feel like they're priced fairly for the market, but I factor everything into my price. Not just the cost of materials, and shipping, but all the time I have to spend managing orders, printing labels, folding boxes etc. It can seriously be a full time thing some days. And that's not factoring in the #1 cost: the time to develop things. I spend hours and hours getting the art right so I'm happy with it. And I know you feel me on that one! That time is precious, it's what makes the mod count.
I honestly don't think I've had a single person complain to me about my prices. But if they did I'd basically shrug. I wouldn't be a dick or anything, but if it's not worth it to you then don't buy it, these are just for fun. I'm not selling water in the middle of a desert.
I'm working on something new right now that's more ambitious than my previous projects. It will require multiple vendors and assembly and more prototyping and research than usual; if I end up offering it to people it will probably not be cheap. If people think it's too expensive I simply won't make it, I'll enjoy it on my personal machine (only hint I'm dropping!) and life will go on.
So figure out what you think you should charge. And then add 25% to that because you're probably being too conservative.
Feel free to PM me if you have any questions.

Quoted from Aurich:

I don't, and I'm honestly ignorant of that whole side of things. I guess if you're set up right that you can get a resale license, and then not pay sales tax on the materials you need to buy to sell? I dunno.
I'm used to running a business and paying taxes, but I'm not any kind of retail expert, my income is a service/consultant driven thing. This is just a hobby, it was never meant to be any kind of job or make serious money. I'm paying the IRS and that's about as far as my crazy advanced scheming goes.

Quoted from Chitownpinball:

If they come out with a color DMD, the gate that opens gets made, and you make this a go, this is going to be one sexy game.