You shouldn't have to refund anything unless it has been returned to you in the original condition, they also must provide paypal with tracking information to prove the return.
have had this a fair few (hundred!) times but you do have to ring Paypal up and make the point that someone is trying it on, you need to send all copies of e.mails to paypal as evidence.
This normally works but the phone calls take a long time and are expensive.
Either that or tell the buyer you want the item back before a refund and use their address to find the nearest army base... tell them you have friends in the army at the named local base and they will collect the item to save them postage costs... amazing but normally the disputes disappear.
Either that or knock up a fake solicitors letting demanding the funds returned... i know all of this makes me sound very dodgy and bending laws but i have been ripped off for £000,s when i used ebay as part of a business and having to deal with attempted online thieves everyday of the week!
at the end of the day, if you know the item was fine then they are trying to steal from you, using the corrupt ebay/paypal system that doesn't give enough protection to sellers.
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