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Hello
A few things. No matter what you say on your listings if it disagrees with Ebay and Paypal conditions it's meaningless.

Second, as you are a private seller, unless the buyer can prove that the item was significantly not as described then they will lose any dispute. To prove this they would have to take it to an expert, get a signed statement and fax it to Paypal. They buyer would then have to wait until Paypal told them to return it at their own expense.

Thirdly, if you don't refund the buyer can still leave you a neg. Depending upon how much you sell this could affect your selling ability.
You could pull their contact details and phone them to sort out the problem amicably. Explaining how to adjust the back to back gauge etc.
As for the track gauge, I have both Kato and Peco track and the gauge is the same.

You could do one of three things. Offer a partial refund. Offer a full refund minus postage. Stick to your guns and offer no refund at all but be prepared to recieve a neg.
 

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For items bought using Paypal.
Insurance is for the sellers benifit, not the buyers, make it compulsory, not an option the buyer can choose.
Postage is at the sellers risk, not the buyers. If you cannot prove that an item was recieved by the buyer you will lose any Paypal dispute.
In the UK, if an item goes missing in the post, then the seller can be refunded for up to 10x the cost of the stamp used by claiming from the Royal Mail providing that they have a free certificate of posting. See http://www.royalmail.com/portal/rm/content...mediaId=3100011 for details.
 
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