That is blackmail and may rise to the level of criminality. File a police report now in your and/or their jurisdiction (if you know it). If you know their address they may get a visit same-day. It's often easy to do online. Be meticulously accurate and truthful obviously, as filing a false police report is a crime. (Just ask Jussie Smollett!)
I don't know what they can do to your reputation and business, if anything, so I can't tell you what to do, but if you fold once, what's to stop them demanding more again and again? Fighting back might not guarantee a nutjob won't harass you, but if they're a serial scammer they'll likely move on to an easier target. Be sure to report them to eBay and PayPal too, so at least their current account will be burnt.
Good luck out there.
