I think your best bet is to make the case that he ran it out of spec and either A) did not do it correctly thus was not able to get it to work, or B) did is so poorly that he damaged it.
I would think that if someone bought a dodge neon on ebay then made a claim that it wasnt running right or even worse the motor blew after they filled it with race fuel and dumped a few NOS shots through it they wouldnt have a leg to stand on, how is this any different?
You may be screwed because of the paypal red tape, but I would definitely make a case based on the time between him receiving it and him filing the complaint, the fact that he ran it out of spec and admitted it, the amount of times he did equipment swaps and the chance that he could have damaged it at any time during handling.
I would also beat him for every drop of info possible. If there is one thing that I have learned in my industry it is that your average person is good at telling a quick lie (for instance, my wife asking "honey did you come straight home after work?" - "Yep") but very few people with the exception of the pathological variety and sociopath's are able to tell, and maintain an elaborate multi-layered lie, the more info you can get out of him, the more info you yourself can take and organize and wait for the slightest slip up that will allow you to unravel the whole thing.
Finally, I would search his user name (and any other identifying info) across the far reaches of the internet, if the dude did buy it to burn it you can bet that he didnt do it just for his own enjoyment and you may be able to find a youtube video or forum post demonstrating him doing just that.
1) Do everything you can to cast doubt on his story, if even the slightest bit because remember "if there is any doubt, there is no doubt"
2) Do everything you can to cast doubt on his ability to handle the said equipment ("if there is any doubt, there is no doubt")
3) Make your case professionally to paypal using everything that you know and can prove (if it gets that far)
4) Keep him talking, whatever you can do to keep his mouth running about what happened, the more speaks, the more chance you have of catching contradicting info
5) Go on the hunt, track this sucker to the end of the net, if he did do something stupid enough to burn it out, you can bet dollars to donuts he didnt keep it to himself.