If this is for testing purposes, e.g. a development box, you may be able to "fake it" provided you can answer yes to the following items:
You are not on a business network and you have either a Static or Dynamic IP address assigned to you by your ISP.
You are working off of an XP Pro or Vista Business+ Box that has IIS running. (Vista Home MIGHT also be able to run IIS but I forget)
You are able to make changes to your local copy of IIS.
The network that your PC is on is either A) connected directly to a cable modem that does not have a built in Router or B) is connected to the internet via a router. In both cases you (or someone else) need to be able to administer changes to the router (this only applies to secnario A if the cable modem has a built in router).
If you answered yes to all of these you might be able to "fake out" PayPal with a bit of DynamicDNS. Head over to http://www.dyndns.com/services/dns/dyndns/
and click 'Get Started' and create an account (everything we will be doing is completely free). Once you get logged in click on 'Host Services' and then 'Add New Host Name'. One the next screen select a host name. I personally dont use a wildcard alias and don't see why you would need to either. Leave the Host With IP address radio ticked. For the IP address click the 'Use auto detected..." and leave mail routing unchecked then click 'Create Host'. On the next screen just click next and check out. Again this is completely free and will be reflected as such by the 0.00 purchase price.
Once you have completed this step and DNS has refreshed <yourhostname>.domain.com will now point at your box! Now, before you run back into visual studio you will want to do download and install this client on your machine IF your ip address is dynamic (if it is static dont worry about this): https://www.dyndns.com/support/clients/
What this client does is send your current IP information to DynDNS so that your host name is continually resolving to the correct IP address. This is necessary since you have no way of knowing when the lease on your IP address will expire and your ISP issues you a new one.
There are two things left for you to do. If you have a router somewhere on your network you will need to log into your router and redirect all traffic coming to your IP on port 80 to your computer. This is farily trivial with LinkSys routers and don't imagine its to much of a pain with other brands but RTM.
The final thing that you will need to do is setup IIS properly. Since you are using the personal version of IIS you are limited to one website and while there are some tricky things you can do to get the hostname to resolve to a virtual directory but your best bet is going to just test the PayPal coude out of your home directory (by default it is inetpub\wwwroot\). What I would do before you go to all this trouble is drop a simple HTML file into your webroot and goto: http://<yourhostname>.domain.com
and see if the HTML file appears (i am assuming here that you have given the file a name so that IIS recognizes it as a default document such as Default.htm or Default.aspx otherwise you will need to specifiy the file name in the URL). If the page does not appear your port forwarding is probably not setup correctly. Again, RTM.
After that, you SHOULD be able to provid that hostname to test the paypal api stuff with. I have never tried it using DDNS but it stands to reason that it should work. One thing though, if it is using SSL make sure that port 443 also redirects to your machine.