Paypal issue beware.

Very frustrating story, and a good reminder to all those here who so happily state that THEY have never had a problem with PayPal...not yet.
Did you at least insure it for value so that you could be reimbursed?

Yes, But since the guy accepted it and it didn't get reported when it was dropped off they refused the claim. 

I don't know if the damaged happened in shipping since he didn't inspect it and report it or when he received it.  

In order to operate online business successfully gotta be able to USE paypal instead of paypal USING you. You need to be salty and grab CASH as fast as you can after sale, because paypal is not your pal -- it’s your worst enemy you want to keep close so you can control it and USE it. In order to sell $500+ item, you need to make sure your paypal account will be capable to give you cash right next minute without holding. One account busted with ridiculous problem like that -- another at least few should be active while you fight for first one. and so on and so fourth. Need at least several accounts to operate safely. They wanna refund? Fine! -- not my problem cuz I need cash and I will get it and if necessary, will sacrifice account with no risk of affect on credit history. NEVER MERRY active bank accounts to paypal meaning ones you get your wages. Prepaid accounts is BEST to use with paypal, because they can’t have negative balance. Once again want to refund $3000 or $3M? Fine! I got cash see ya!
Your current action will be is to use municipal court to summon bastards. Usually they don't show up or present rookie representative that knows nothing of a matter and you will get default judgement towards your benefit.

OP,
You should have the buyer send you pictures of the damage so that you can make a legitimate claim. He should also make a statement to them in your support. Sounds like he's just looking out for himself so far.