Dave, have you contacted PayPal and opened a dispute? I'm not sure if their normal rules apply when the money was sent as a gift but usually if there's a product to be shipped as part of the agreement, PayPal will take the side of the buyer unless the seller can prove that the item was shipped and received. And this proof has to be in the way of online tracking.

Unfortunately I think that's the only option you have. If there's no specific product or auction or sales data tied to the transaction (such as would automatically be populated had you bought through eBay), you may be able to prove to PayPal through providing them emails of the transaction that the gift was for a product and that the seller asked for the payment as a "gift" in order to bypass paying the PayPal transaction fees. If they accept that, the seller will have to prove he sent the product and, if he can't, PayPal will debit his account and credit yours.