I sold a virtual account
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In cases where a customer disputes delivery of an item, Paypal puts a hold on the funds in question, and then asks the seller for verification that the product has been delivered.
Upon sufficient proof that the item has in fact been delivered, those funds are then released to the seller. If sufficient proof is not provided, then the funds are returned to the buyer.
Since you make no mention of being ever contacted by Paypal as part of the dispute process, or of providing them with documentation, or of whether they found that documentation sufficient, I can offer no clues as to what may have transpired.
However, anyone who has done business with Paypal for more than 5 minutes ought to know that Paypal places a much higher burden on the seller to correctly and thoroughly document their actions than they do on the buyer.

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