I feel awful for your predicament, Laurin. I hope that you can take it further.
As far as I'm concerned, you did everything right. I think you need to keep pushing Paypal. If they are anything like the Postal Service when it comes to claims... you have to really keep at them. I suppose it is their way of filtering out the fake claims.
Here is what what it says in my Paypal Resolution Center ...
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Seller Protection
If you received an unauthorized payment (for example, from a hacked account or a stolen card) or a buyer claims they never received their item, our Seller Protection covers you for the full amount of the payment on eligible sales.
You can still be eligible for Seller Protection if your buyer is outside Canada and your sale qualifies.
For more information, see our User Agreement
Protected Sales
Eligible items must be tangible goods sold by sellers with a primary residence in Canada. To ensure you are protected, you will need proof of shipment or delivery. If a buyer files a claim, you must respond to our requests for information as outlined in our communications to you.
Be upfront about all the details of the item, specifically defects, use, and abnormalities. Also, disclose an accurate delivery estimate.
Proof of Shipment
Proof of shipment is required when you received an unauthorized payment and can be an online or physical proof from the shipping company. It should include:
The date the item is shipped.
The buyers address that matches the shipping address on the Transaction Details page. This address should indicate at least the city and province, or city and country, or postal code (or international equivalent).
Proof of Delivery
Proof of delivery is required if your buyer claims they did not receive an item from you.
For intangible items (like digital goods or services), this is online documentation that the item or service was provided to the buyer. For example, documented evidence that a file has been downloaded as of a particular date.
For tangible items (like electronics or clothing), this is online documentation from the shipping company that should include: date the order is delivered, item listed as delivered, buyer's address (include city, province or postal code). If the full payment amount is over $850 CAD (or local currency equivalent, including shipping and tax), you will need a signature confirmation on top of the proof of delivery.
Please ensure the item is delivered to the shipping address listed on the PayPal Transaction Details page.
Items Not Covered
The following are not covered:
Items that are picked up locally or delivered in person
Services
Intangible items
Digital goods
Sellers received multiple payments for the same item
Items that don't match the seller's description
Items that are not shipped to the buyer's shipping address on the Transaction Details Page
Payment Direct Payments (payments processed by PayPal that are funded directly by a credit and not through an account, such as payments made through PayPal Payments Pro but excluding payments made using guest checkout)
Virtual Terminal Payments (a payment processed by PayPal through the Virtual Terminal flows that is funded directly by a card and not through a PayPal account.)
PayPal Business Payments (refer to User agreement)
Reassuring Buyers
Become a Verified seller to give buyers additional peace of mind and attract more customers.
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Resolution Support
We provide full support to help resolve any buyer disputes or fraudulent payments.