Paypal issue beware.

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.

Pay Pal is the worst.  
They are a 3rd party vendor who Leaches off actual processor systems.Their entire business model is to contract with the actual processors and throw their service fees on top and pass that all off on their customers.
They market themselves as being a safe but most of all fast. Every one likes fast until there is a problem. When there is a problem they pass that off their customers as well as long as they can get away with it.  To actually fix a problem takes time, resources and money which they do not want to deal with. 
To fight with them you have to be prepared to get Nasty. You need to demonstrate that you are not going away and that if need be you will bring an army of resources to conduct your own investigation into their business practices.
I had a similar problem with them several years ago and they were giving me a the whole run around as to their investigation policies and why they were justified in sticking me with the loss. I had to threaten to sue them, not in small claims, but to get the US attorneys office to conduct an investigation since this would constitute Mail and Wire Fraud which is a federal case. I also pointed out that if they were doing this to me they were probably doing this to thousands of accounts a day which probably translates to Hundreds of millions a year, which would most likely prompt a class action suit  -
They reimbursed me the Next Day. I never used them again. 

I have stopped using PayPal as a method of receiving funds from sales.  I received payment by a "PayPal cheque" in my last transaction and it took PayPal 10 days to clear.  I could have got a Cert. Cheque or Bank Draft through normal mail twice as fast.  PayPal had the use of those funds during that period and they charged me 3%.  Ridiculous.

I now use bank draft or e-transfer.