Wait for PayPal to tell you what to do. They will give you the address to send it back to. Don't send it to any other address, even if the seller requests it. It has to be sent via tracked means, so if it goes as a letter, it should be registered. If you send it untracked, the seller is just as likely to say they didn't receive it, then you lose your money. 

PayPal may even say not to bother returning it, especially if the cost of postage is more than the actual item. I would escalate to a claim as soon as it will let you.