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You'll need to understand that when you sell on eBay and/or use PayPal to receive payments, buyers are the ones who can dictate rules. It doesn't matter that much who is right, if buyer wants refund he can claim that item is broken, not as described, he can smash the item with hammer and then take picture showing that this is how the item arrived.
For example, I bought item from seller couple months ago. Seller never uploaded tracking info to PayPal even though he sent the item. It has now been several months and the tracking number which was on the package is no longer valid, you can't see that the item was delivered even if he would now enter the information. I wonder if he even saved the shipping papers/info since it has been so long.
I could possibly file dispute about item not received and get my money back. This is PayPal.
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Why didn't you cancel the sale when you knew the buyer didn't want it? Why did you a ship an item to a buyer when the buyer had already asked to cancel?
Pushing an unwanted item to a buyer is a recipe for disaster.
Failing to ressolve an issues with a buyer is another problem. When you fail to resolve an issue, the buyer become emboldened to pursue other chanels and at each point the seller risks a greater loss. If you had resolved the first issue with payPal the buyer would likely have been required to return the item. But again you allowed the buyer to push the issue with PayPal and again you refused to resolve. So now PayPal needs to make a decision about who is telling the truth and you already have a history of refusining resolution on this case. That left little option for PayPal other than force a refund and not require return.
As you stated at the end "They clearly didn't want the item", so why did you ship it?
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It's not rocket science to keep an item when a buyer doesn't want it. Seller is responsible for seller's action; that's how you run a successful business.
It looks like you wasted a lot of time and money on this buyer; it could have been avoided by not shipping the item.
The buyer might have been required by eBay to buyer, but the buyer was not obligated or required to NOT file a dispute and ask for a refund; that's where good business judgment comes into play before shipping the item.
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As long as you make this the buyer's fault there would be no other resolution other than what was determined by PayPal. Seller's need to take responsibility for their own business decisions ( you sell items, therefore, you are a selling business).
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You're facts are not relevant to the case as they are not accepted by PayPal as "facts" When a buyer doesn't want an item, the buyer will be inventive in ways to legally get a refund. A buyer is not legally requred to keep an item when the buyer can find a way to get a refund. That's the way business works. That's the risk in selling online.
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when you sell on EBAY,you must realise there are bidders who are not honorable,they have buyer remorse,they cheat and steal your item,they lie about condition so they can make you pay return shipping/
When a buyer said cancel the order,the smart one will cancel the order instead of forcing him to find other ways to get out of the contract.
now you learn what kind of venue Ebay is,be wise,cancel the order ASAP ,now your lost your item,you shipping and your time.
He can also go to his cc issuer,then you pay $20 penalty
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you can always relist or offer t o the next highest bidder.
if he does it too many times,Ebay will suspend his privilege of bidding and buying
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