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I think it is important to report the positive instead of only just reporting negative. In this case, I followed the instructions of PayPal Support and submitted the IC3 report and other supporting documentation and PayPal ruled in my favor over the weekend. If I calculated the number of hours I spent on this dispute VS. my hourly wage, I lost money but I'm thankful that someone at PayPal manually reviewed my case and made the right decision.
HUGE UPDATE TO THIS THREAD! - PayPal has now changed their return/refund policy to mitigate this scam --
LOL - So, I finally got to the root of why PayPal won't refund our money... A PayPal support rep stated the following: "Regrettably, it is against PayPal's policy for either party to keep its merchandise and the money. " Obviously, these cons have figured out this is a great policy to exploit! The seller knows that there is no way to return any item back to China with accurate tracking for under $36 (and that is for the smallest USPS Priority International Mail. The seller also knows that for PayPal to refund our money the item has to be physically delivered back to the seller. So, as dozens of other have reported, even if you sent the item back, the seller likely gave you a bogus address for the return and the item just gets "lost" and then the seller just claims he never got it and you have no proof it was delivered.
OK PayPal - your policy needs to be fixed. There is clearly a difference between "Item not as described" and "I did not order this item." If I seller makes a mistake and sends you a completely different item than what you ordered, and you can prove it with invoice, and photos, or in these cases, knowingly sent you the incorrect item to commit mail order fraud, it should be the sellers responsibility to provide a return shipping label, not the buyers.
Further, if PayPal is so concerned about someone keeping the money and the item sent to them, I will just send the item back to PayPal and they can keep it or send it back to the seller.
WAIT WAIT - Look what I just found: This is PayPal's new policy going into effect on July 30th: https://www.paypal.com/us/webapps/mpp/ua/upcoming-policies-full .
Amendments to the PayPal Account User Agreement
So that tells you right there... that PayPal is aware of this scam and they are changing their policy, which of course doesn't help any of us who have been scammed before this policy went into effect.
Yep that came out a little while ago BUT it would only apply to transactions made AFTER that policy was put in place which sadly a lot of the posts on these China website threads were from sales before that policy applied.