I'll bet you a BFL jalapeno* they have no balance in their Paypal account...
It took several days for my refund to process through PayPal, which I believe meant the PayPal refund had to be funded from their bank account. My order was a small one, so the PayPal account had to be almost completely empty.
Of course I waited until the refund cleared before starting this thread.
As a seller who has unfortunately worked with a buyer using stolen credit card, I can tell you that the refund is not contingent on them funding it.
They will get a bill from Paypal for each person who gets a refund from a 0 balance account.