Reporting paid links

Maybe slow down a little. There's nothing wrong with paid advertisements. That's what businesses do -- pay for advertising. That's what Google's own AdSense/AdWords is all about after all -- paid ads. And every time you do a search in Google, you see paid results at the top and right side of the results page. Paid ads, supported and encouraged by Google.

What it sounds like you're talking about is blogroll ads. That column of short, few words, text links on the right side of a (usually) WordPress site, right? That's not "illegal." Whether or not Google gives much credibility to these as far as SERP results is debatable. I suspect they don't (it's pretty obvious, even to an automated spider system like Google uses, that a series of short contextual links grouped together are paid-for ads). People can argue til they're blue in the face as to whether blogroll ads work, are "legitimate," are "fair," etc. But they exist, they're well-known to Google and everyone else, and aren't really a big deal.

Most people would agree that something like a contextual link within an article on a page with some PR is far more valuable and important in ranking for a keyword. Why not just work to get those? And, if you think blogroll links are helping your competitor in ranking, then why not fight fire with fire and get some of those yourself? I personally don't think they help much, if at all, but if you think it's working, then get some. I'm sure you can find many site owners that will give you a little text link for just a few bucks.

You might want to keep in mind what "online only" said above -- karma's a bitch. If you try to destroy a person's site/business because that person is getting some blogroll links, you should probably expect some pay back that might not be pretty for you. Just focus on getting good backlinks for your own site and don't worry about what the other guys are doing. If the person was doing something really dirty and personal, like trying negative SEO on your site, I'd hold a different opinion of the situation. But that's not what's happening. This other person is (in your opinion) simply beating you out by promoting his own site in a way you don't agree with. I'd say if you escalated this to you doing negative SEO on this person's site, your crime is far worse than your competitor's so-called crime.