If you do send it back you could take some photos of it first with a newspaper or something else with the date on next to it maybe? Then at least you have some proof as to what condition the item was in when you returned it.
Have to say that I don't think you can demand a refund before posting it back. As a seller there is no way I would ever agree to this!
Think going through paypal is a good idea though as at least it is then on record that you have told the seller about the probelm. As long as it gets resolved amicably then it will make no difference to seller.
Other thing is that they may be genuine - if they are a new seller they will not want to risk your bad feedback so actually might be more inclined to be helpful than someone who has thousands of feedback and for whom a single neg will make no real difference. I might be just looking on the positive side though !!!