Standard Practice is to follow Paypal's policy-- and PP will not refund money they never handled. Since all the payment they handled was your original payment, that is all PP will refund. (This includes refunding the fees that PP took before sending the seller the money, so refunds cost PP as well as costing the seller.)
For a seller this has the benefit of preventing foolish returns. For example, if you buy a red sweater and when it arrives it is scarlet instead of cherry red, that would be a case of "buyer remorse" and the seller is not at fault for the description. If you want a refund or a replacement* the original item should be returned at your cost.
However, there is also a Best Practice. If you bought a red sweater and received a blue sweater, the error was the seller's and she should be refunding your return postage. But there is no method for enforcing this.
*Personally, I would never allow a replacement to be sent, only a refund. There is the time factor and no reason to believe that the replacement will be any better.
