I do not believe this claim is actually even covered by Reg E - the customer authorized the charge and the correct amount was debited. So, I'm more concerned about MC chargeback rules.

Customer claims that received what she ordered (horse bridle), but felt it was defective so she sent it back. She provided us with the tracking number and we can see it was delivered back to the merchant. This was something she ordered like on one of those Facebook garage sale things and the payment goes through Paypal. The "merchant" says that when she received the item back, some of the jewels on the bridle were missing and it was not in the condition it was when they sent it to our customer - it had obviously been used during the time she had it, so they sent it back to her. Our customer claims she didn't accept the package when it came. Our staff talked with Paypal - they sent us the email conversations, etc. and they feel the "merchant" is in the right (partially due to some lies/inconsistencies in our customer's story, etc.).

We feel the investigation can be closed and that we do not need to credit the money back given the information we have at this point.

Agree? Or, would MC rules require that we go even further on this?

Although MasterCard has a chargeback reason for "Defective, Not as Described," you have the right to evaluate the evidence your cardholder has provided. If you determine that a chargeback is not warranted based on the information that you have already obtained from PayPal, then you are under no obligation to take this any further. It sounds like your customer already used PayPal's dispute process and lost. Now they are trying to make it your problem. Don't let them.

That's what I was hoping, Brian! Thank you!