Ok, how about this. You refund him his money, mark payment not received, and file a payment not received complaint against him? Will this fly? I had this idea for ages now, never got to test it.
If that don't work, this is what I would do. Ok, you are absolutely right, why don't you send me the item back, and I will pay for your return shipping, and I will also refund you full price, 100% of what you paid including shipping. However, I ask one thing in return, I would like you to not leave (or remove) negative feedback. That's one condition I desire, please give me a cutesy of not leaving a neg, and I will refund your money and pay for return shipping.
When I communicate with buyers. Let's say he e-mailed me, telling me the product does not work. I don't go into defensive mode automatically. I talk to him in this manner.
Hmmmm, interesting, never happened before. It wasn't my intention to send you a unit that doesn't work.
Sorry about this one. Hey! There is this troubleshooting you could do, or how about this, I'll take the product back and give you a refund? Let me know what you want.
I don't send him troubleshooting steps yet, I want to know what's on his mind. This was just a message to disarm him.
Now, he says I want my money back. At this point ask him to send the product back. If he asks you if you will pay for return shipping or if you will refund the shipping he paid, tell him, well, the standard policy of all buyers is buyer is responsible for shipping.
Of course I will pay for your shipping (or for return shipping or both), because I want you to be happy with your eBay experience. But, since we are a little far off from standard policy, I want you to give me a favor. I would like positive feedback in return for this. I know you don't have to, and that's not a problem at all, if you feel I'm a horrible seller it is your right to give me negative feedback, nothing changes, I'll refund your money anyway. Let's do this, send everything back, leave me positive feedback, I'll refund it all.
If you don't want enemies, refund it all just like you said, you'll make that money back in no time. But you could also be bad and just refund the money you should refund him, not shipping, return shipping, etc.
Life's just a bad trip, it's a ride, we can change it anytime we want to.