I had another guy send me something that might help clear up how PayPal works. I will post his message and I will also call PayPal tomorrow and get something from them in writing.
6.Seller responsibilities for Non-Receipt of Goods reimbursement requests. If a buyer has purchased a Money Back Guarantee and submits a reimbursement request that indicates non-receipt of goods, and if the seller does not provide a tracking number or proof of refund to PayPal within 7 days after the buyer files a reimbursement request, PayPal may (1) refund the buyer out of the seller's account or (2) reimburse the buyer and then recover the funds from the seller. If the seller does not have sufficient funds in his or her PayPal balance in the currency of the original transaction, PayPal may limit the seller's access to his or her account until the seller authorises PayPal to use funds from their balance, bank account, and/or credit card to recoup the amount paid to the buyer. If the reimbursement request is complete and accurate, PayPal is still required to reimburse the buyer for the amount of the transaction minus the Guarantee fee, even if the seller does not have sufficient funds in their balance.