If you use your own PayPal account to accept payments, they can't be refunded in your Etsy account.
How refund a PayPal payment
- Log in to your PayPal account.
- Find and click the payment.
- Scroll down to refund the payment. You can select a full refund or a partial amount.
You'll receive a refund of your PayPal fees based on the type and amount of the refund you issue.
If the buyer used a credit card without logging in to a PayPal account (in other words, if they used PayPal Guest Checkout), the refund will go back to their credit or debit card. It can take up to 30 days for the refund to show up on their card statement.
If the transaction is over 60 days old, you won't be able to issue a refund in PayPal, but will have to Send Money to the buyer.
For more help, here's the link to PayPal's Help Center: https://www.paypal.com/us/selfhelp/home
Note: Refunding doesn't cancel an order on Etsy. Learn how to cancel an order.