I have been through a similar situation as a seller. After many calls to USPO, Paypal & Ebay, here's the bottom line:
When you are the seller, you are 100% responsible for delivery of the item. If the item doesn't arrive, you eat it. You can do it nicely - issue the buyer a credit, or the buyer can force your hand - they file a claim. Ebay has Total Buyer Satisfaction. That's why you should always get insurance as a seller if the item is more than you are comfortable losing.
Here's the twist. Paypal will cover the buyer if the seller says they didn't receive the item, and the USPO says it was delivered. Seller should still issue a credit to the buyer, but seller has recourse with paypal. (The buyer may also have recourse with paypal too, not dropping it in the lap of the seller, but I'm not 100% sure in this case)
In my case, the package, with tracking was lost. Vanished... Poof... Paypal would not cover me saying it was the post office's obligation. They told me they would cover me if it had been showing that it was delivered and the buyer claimed they didn't receive it.