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Our return policy is clearly stated on our website. We do not accept return of final sale items or opened items. Customer has returned item that was both on final sale and has been opened. What is my obligation in terms of refund?
Unfortunately you agreed to Paypals terms of service when you opened a Paypal account to use for selling and those terms state that a buyer can open a dispute for non receipt of item OR item received but not as described.
However if it is for the latter then they should normally wait for Paypals decision before returning the goods, but if paypal do find in their favour they will ask them for trackable proof of the item back to you and then you will need to refund.
If Paypal did not find in their favour then your terms of service would come into play so then you can tell the buyer 'you will return his property' if he pays your shipping costs again or agree a discounted refund?
A lot depends on what country you are in as distance selling laws can come into play and allow buyers to return items bought online up to 14 days.