The first warning should have been him asking for send it Pay Pal "gift" If he's willing to cheat Pay Pal what's to say he won't cheat you? I was going to buy something from someone on her and when he requested it be sent as a "gift" I refused to buy from him and told him why. He got all upset but I refuse to buy from someone who want's payment sent as a gift.
I thought it was customary to send it as a gift so as not to pay fees. I generally request it that way and it's generally requested of me. I've never viewed it as a sign of trying to screw someone.
You're screwing Pay Pal. They're offering a service and you're using it without paying for the service you agreed to when you signed up. Also by sending it as a gift you can not go back if they guy sends you something defective or doesn't send you anything at all because you sent it saying it was a gift, nothing is expected back when you give a gift.