Was scammed $3,000 using PayPal!

Unfortunately this scam described by the OP is being reported by vendors in the motorcycle and firearm accessory industries as well; high-end optics in particular are a favorite target. Also, it's not the buyer's bank that is ultimately removing the funds from PayPal to return to the buyer, it's the credit card company / merchant processor doing it because the buyer backed up his PayPal account with a credit card, and not a bank account.

Of course, it costs the CC companies nothing to resolve the dispute in the buyer's favor, and in fact they would prefer to keep their customers happy and continuing to use credit, which makes them money. And perhaps it's snark on my part, but the CC company also hits PayPal with a chargeback fee, so maybe there's a bit of additional incentive to 1) ding a competitor, and 2) discourage vendors and small from using PayPal.

Originally Posted by WebSlave

If there is a practical and viable alternative to PayPal for internet payment processing, I sure would like to hear about it.

As the OP has shown, PayPal is becoming extremely risky for sellers, and very safe for buyers as long as the payment is backed up with a credit card and not a bank account since the CC company will fight for you if there's a dispute (or if you're a scammer). There are alternatives but which to use depends upon how much risk the buyer and seller are willing to accept.

For instance, merchant processors such as Square or EMS+, that don't have a monthly fee but just a swipe fee per transaction, are becoming popular with small businesses that may only run a few CC transactions per month. All you need is a smart phone or internet connection, and you can process credit cards. While there is still the risk of a chargeback, at least you - and not PayPal - are dealing with the merchant processor.

Programs such as Chase QuickPay facilitate no-fee ACH transfers between the sender and recipient's checking accounts. While very safe for the seller, it's very risky for the buyer as there's no way to initiate a chargeback. So, the buyer would have to do his due diligence and research the seller's reputation before sending the payment.

As always, there's the good old USPS money order. Not very safe for the buyer but safe enough for the seller, assuming he cashes it to the post office.

Finally, there's crypto-currency but not a lot of people are using it yet. The most well-known example is BitCoins. Due to their value fluctuations compared to the dollar on a day to day - and sometimes minute to minute - basis, I would be hesitant to use them as a seller unless I could watch the payment post to my account, and then immediately make a transfer to my regular bank account.