We now support automatic returns through PriceYak! This has already saved some of our biggest users hundreds of hours of time. Read more here.
You'll want to go to your Amazon Seller account, create a RMA (return) for the item, and it will give you a PDF to print. Then, email that PDF to the buyer, and tell them to stick it on the item and ship the item out to Amazon.
When Amazon confirms that they have received the item back, you will need to process the replacement order or refund manually. If you are processing a refund, login to PayPal and refund the buyer's transaction. Also be sure to cancel the order from "My eBay" to ensure that you are credited back the Final Value Fee from the sale.