Some body bought something from me and after receiving it, decided it wasn't what he wanted, so they're sending it back. I paid the shipping to them. Would it be wrong of me to deduct the shipping cost from the refund?

Nope....

it is normal for any store to refund the price of the item, but not the shipping and handling...

I like this policy whether I am buyer or seller. If buyer just simply changed thier mind or didn't know what they were buying then refund only the purchase price. If item was misrepresented or damaged then the seller should pay all shippings. and refund.

Well, I received the returned motor today. The buyer claimed that the shaft was "wobbley" whatever that means. So first I checked it with a dial gauge and it showed it was true. Then I mounted an APC 7x4 prop and ran the motor up to 12,600 rpm. No vibration or shaking of any kind. Here's a photo of my test. I believe the buyer didn't know what they were buying and changed his mind when it arrived. So I deducted from the refund the price of the Priority Mail to send it to him, the price of the box, and the price of the MO. If he complains, tough.