I just checked with my paypal representative. I found out that
a) when you refused the package, you were automatically screwed (I know I already stated this but I am reiterating the fact). in all those things you agree to, this is in there. if a dispute is filed against you and the buyer wins the dispute, if you (the seller) refuse the package and the buyer can show proof of this in any way, you are out the money and the item. the buyer attempted delivery and you chose to not accept it. it was your choice to choose to NOT accept the item.
b) the buyer is NOT responsible for ANY customs fees associated with the item. if there are customs fees involved in returning the item, it is the sellers job to pay these. these are based upon your own countries regulations and laws. it is NOT the buyers job to pay for fees your country may be charging you. they ARE, however, responsible for all SHIPPING fees in returning the item to you. if the buyer did not pay for ALL SHIPPING fees, then you have some ground to stand on. I am assuming, though, that all these fees you were supposed to pay were for customs fees. As stated, you are responsible for all customs fees or other taxes your country may be charging YOU to recieve the item.
HOWEVER- if the item was a return and you can prove it, you will generally NOT be responsible for any customs fees as the item was a return. you can prove this via any of the emails from paypal, I assume.
c) I would contact the buyer. explain to them the entire issue and explain to them that you will even pay for the return shipping. since they already did pay the return shipping once and they have (in their eyes) no reason to return it to you, try to reason with them.
You have no legal bearing though at all. You would lose in small claims court. Why? All those agreements you signed into when signing up for your paypal account. It also sounds as if he did attempt to return the item to you. YOU chose to not accept it.
I dont think paypal will be helping you at all in this instance. Your best bet is to try to work with the buyer to get them to return the item again. Be reasonable with them, though, and try not to lash out at them. You have every reason to be upset. Yes, paypal sucks in instances such as these- BUT there is nothing you can really do about it. Its part of the risk in accepting paypal.