To dial it back a notch, irrespective of what I am legally entitled to, there's also the question of coming to a resolution that's not completely counter productive for both of us.

The item was sold for $9.50, with $13.40 postage.

Let's say you give me a full refund: that's $22.90. And I send you the cat toy back: it's worth at most $9.50, and that's ignoring the fact that it has a fault not mentioned in the original auction, which presumably means it's worth considerably less. But let's ignore that for the moment and just say that you've paid me $22.90 for the return of something that, at most, is worth $9.50. You're now $13.40 worse off.

In reality, if we assume you're an honest seller and will list the problem in any subsequent sail, I think you'll have difficulty selling it at all. In which case you will actually be the full $22.90 worse off, since you've paid $22.90 for something that's worthless to you.

I, for my part, have to wear the cost of sending it to you at my own expense. Let's assume my postage is the same as yours, and I too am now out of pocket $13.40. Although I do receive from you $22.90, which I suppose means I'm $9.50 better off on a cash basis. But the replacement parts I ordered from the US are now essentially useless to me.

It's clear that if I return it to you for a full refund, we've both lost out.

On the other hand, suppose you give me a 50% refund. In that case you've lost $11.45. This means that you're $1.95 better off than you would have been if I'd returned it to you for a full refund.

Once again, saying that you're $1.95 better off  is ignoring the fact that if you list the fault in any future auction, if you're an honest seller and include the fault, you may not sell it at all. If the toy remains unsold, you're $11.45 better off if you just give me a 50% refund.

I'm hoping we can de-escalate this a bit and resolve this rationally. I think if you "do the math" (as our American friends are so fond of saying), you'll see that you are actually better off if you just give me a partial refund.

Regardless of whether ebay or the law requires you to or not.