I'd get in touch with Trading Standards or Consumer Direct, they should be able to tell you where you stand. Whatever they tell you, pass this information onto the "customer" and PayPal. They may tell you, for example, that it's now the customer's duty to collect the item from the post office. If you've sent the goods to an address given by the customer, and they've then cancelled the payment, that's theft. Or fraud. In either case, he's in trouble.
Is it a member on here? No need to name and shame, just a simple yes/no.