p*t*i I am confused by the following statement My advice would be to refund this customer and close off the dispute.   If at all possible to lodge an unpaid item dispute after the Paypal dispute closes off - I would do so. How can a seller refund the payment and then claim the item remains unpaid?

You are absolutely right bump; once the payment was made, of-course it is not possible to start unpaid item case.

Refunding also does not stop the buyer to leave NEG.