Your buyer was not dishonest in any way. He never received the product he ordered and paid for, he should get a Full refund. He never received anything of value, so why should he suffer a loss? As a seller I feel it is totally your responsibility to either deliver the goods or take the consequences if said item never arrives.
That fact he reimbursed you for shipping and pay pal fees in no way gets you off the hook to deliver the goods. That is YOUR responsibility as a seller. If you order something from Cabelas, who pays the shipping? You do! If you never receive the item, should you just be out the money? I don’t think so!
Regardless of how things are done, that is the only fair way to handle it.
If I ordered something from you that I never received and I lost my money in the deal, I would be on every website saying don't buy from you.