You should file a dispute asap to have it on record with PayPal. As with any issues, PayPal will investigate and give the seller a chance to respond when you file a claim. After hearing responses from both parties, they will make a decision.
I assume significant time has passed and PayPal has released funds to the seller. When you file a claim, it will be a negative balance on the seller's account (assuming the seller's balance is zero when you file the claim) and PayPal will demand the seller to deposit money to cover the shortfall. In short, you should file your claim quickly because it will give the seller the urgency to resolve the issue.