If you used a credit card with Paypal and called the bank and they said, "tough luck," but you didn't fill out the "official" paperwork with your bank, I'd do it. The Truth In Lending Act requires banks to investigate on a timely basis and not receiving the item that was ordered is one of the fraudulent purchase criteria. If you did use a credit card and file a chargeback, a critical piece of evidence would be the shipping weight of the watch vs. what a kitchen organizer would weigh if you still have the shipping package. If the banks turns it down, I'd file a complaint with the FTC. But, I'm retired, so I have time to do such things!
If you used a bank account for Paypal then your options stop with Paypal policies. My wife just got something from Paypal that caused her to shift her funding Paypal from a credit card to a bank account. Fortunately she mentioned it to me and I suggested she shift it back to the credit card because she then has 2 levels of protection against fraud--Paypal and then the bank that provided her credit card. I can easily see why Paypal wants funding from a bank account-it prevents chargebacks to them that could happen with a credit card funding Paypal account.
I do like the Paypal free return option. The problem is that the seller might dispute it and say that you sent back a fraudulent item--they sent the organizer and you sent back a crappy watch. But, if I ran into a wall, I'd probably do it. The worst that happens is you spend a couple of bucks to send back the crummy watch and don't get your money back.
Good luck--this kind of thing really irritates me much past the relatively minor amount of money involved.