Paypal issue beware.

@programmergeek , sorry for your problems but appreciate the thread, which is full of good information and reminders.
I would add two things after reading through the issues posters have described.
First, you cannot overestimate the value of packing something well and going the extra mile to double box, ship on a pallet (when necessary), and generally over-package everything.
Second, there is value in the Audiogon community and feedback system. It is not perfect, but it is something. Whether you are a buyer or seller, seeing the length of time your trading partner has been around here and reading testimonials written about that person by other folks on this site, provides at least a baseline as to whether you want to trade with them or not. Being able to set parameters for those you trade with is also helpful. For example, when buying or selling expensive and/or heavy hard-to-pack and ship items, there is value in dealing with folks who have done this before and are known for taking extra care in packing, shipping through a suitable carrier, insuring, and following-up. This stuff will not prevent occasional problems but it is something folks can look at to safeguard themselves.

So here is what I have learned from this discussion to do business on PayPal. 

Scam
Buyer received item but says item not as expected. 
Files a claim with PP and can  get money back immediately if it is still in your account. 
They do not have to prove "not as expected". 
They do not have to send the item back to keep the refund. 

Questions :
What if they send back the wrong item
What if they send back an empty box. 

Now you have a worthless  counter claim.... 

Here is what I will be doing from now on. 
Remove all sources of payment from PP other than a prepaid card. 
Fund  prepaid only as needed for purchases. 
Remove all money from PP immediately up receiving. 

Should this protect me from the scammers? 

PayPal is a value tool

Many years ago I sold a Mac preamp to some guy in Italy.He filed a complaint with Paypal,that he hadn't received it.Paypal never bothered to inform me that a complaint had been filed.Anyway,I log into my Paypal account and find that $714 have been given back to the buyer.At that time Paypal had a money market fund that paid the highest rate in the country,so I left money at Paypal.Later,I found out that the Italian postal service is a mess and many sellers won't ship there.A few weeks later the buyer emails me that he received the preamp and the front glass is broken.I figure that being in the Italian post office for 5 weeks,they kicked it around and broke the glass.So,now I decide to file a damage claim with USPS.USPS says the buyer has already filed a claim and I can't.I inform Paypal and they tell me they sent me 4 emails during the original complaint period and I never responded.I know they never sent any emails but contacting Yahoo mail,I'm told that i can't prove that Paypal  never sent the emails.So,I give up and the buyer gets the preamp ,likely damage claim money and I'm out the preamp and shipping expense..Unless you are selling on Ebay and almost forced to accept Paypal,I would avoid Paypal.At least,if you use,have any money received transferred to a linked bank account asap after receiving any payments.

Suggestions for having PP tied to a basic checking/banking acct (min "$100" balance) not tied to any of ones major/personal funds is a very good idea.  However, in the OP's scenario, if PP tries to take $1k from your (basic) acct, wouldn't you incur overdraft fees or other headaches?

Recently, I just went through this WHOLE THING with eBay & PayPal and can describe the process. I'll try to explain this briefly...  I do not carry a PayPal balance, and have been using my account since the x.com days, so I've seen a few scams.  I sold a TV speaker on eBay advertised as NEW.  The buyer made a claim saying it was missing a part.  I fought the dispute and won.  Buyer then files a dispute with PayPal by issuing a charge back.  Note: the person is the problem, not PayPal.  Now in my case buyer paid with a credit card, so it may be different if the buyer used a bank account or PayPal balance.  Now PayPal immediately withdrew the transaction amount (by law as OP stated) + a pesky $100 charge back fee, which I fought and got waived.  The buyer does not have to return the item.  The buyer does not have to prove anything.  The seller can only give their side of the case to PayPal.  PayPal will fight vigilantly on your behalf.  However, there is a mandatory 75 day waiting period.  Since I do not typically carry a PayPal balance, after 21 days I still had a negative balance and started getting nasty emails.  After another week or so, I could no longer call PayPal to discuss and would be immediately be transferred to collections.  After 37 days, I think it would appear on my credit report so I paid the negative balance.  At this point, all you can do is wait.  9 out of 10 cases are won by the buyer, mainly because the seller wasn't prepared to fight with proper documentation.  If you lose, your best recourse is small claims court.  In my case, I was fortunate and won and winning the eBay dispute certainly helped.  It's a risk to sell in the sense that credit card companies view you as a store that should always accept returns for whatever reason, but that is not true as most people do not operate as such.  Understand that PayPal is not a bank, they are merely a payment processor, so if you sell a lot, get seller protection from them.