I say try contact again. Give him a certain date that you will refund the money minus any fees incurred (paypal) On that date refund the money & move on.
Have you tryed to contact him thru paypal. Is there even a way to. Maybe send him a 5 cent payment thru paypal with the same info & refund date in the memo area.
I would not keep the payment that has been made. I have no idea how much it is but it could be above whatever amount & end up theft. Especially if you didn't describe it as non refundable.