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In the event of an item received but not as described dispute it is always one persons word against anothers.
How does paypal know that you did not send the item in the state you received it back in?
They do not so they have to make a judgement call, sometimes the buyer wins and sometimes the seller, this time sadly it was you.
Paypal never sees the item sent so they tend to favour the buyer who has to return the item at their own expense before a refund is issued.
If you don't pay the neg balance then unfortunately you won't be able to use your paypal account as paypal will add the debt to any purchases that you make in the future.
Also if you don't pay then they will pass the debt on to a debt collection agency to recover.