I think offering a partial refund without returning the item (provided they send a picture of the item destroyed) is a better approach than a full refund as long as the buyer returns the item. The buyer still loses the cost to ship the item either way. But this way, you as the seller don't lose the cost to ship the item originally. It's a faster refund to the buyer as well.

But I'm glad to see I'm not the only one doing this. I rarely come across an auction with anything other than fully tested and guaranteed or as-is no refunds.