This is really 51/49. As the situation has pretty much all been solved.. Why did you advertise it as new if it obviously wasn't? And why did you use someone's photo rather than find a stock photo?
Think of it like this. What if you bought Twisted Metal Black online, it was listed as "new", you receive it and it was scratched? It's obviously not new.
You're not in the wrong, but you're not in the right, either. I'm glad you offered him options, though.
On a side note.. are these things any good? I wouldn't mind one in my backroom. Between me being back here screaming and cursing at my XBox, the cats, and eating back here, I wouldn't mind some fresh smelling scents.