What should I do on Etsy if a customer’s inbound package is damaged and discarded?

Hi! In this situation I wouldn’t rush to cancel right away—first, message the customer (in Etsy Messages) that you did not receive the item and that UPS shows it was damaged and discarded, then offer two clear options: (1) they file a claim with UPS and either resend the item (or a replacement) so you can complete the customization, or (2) you cancel and fully refund the Etsy order since you can’t perform the service without the item.

If you and the customer want to keep the order open

• Update the order’s “ship by” date (with the buyer’s written OK in Messages) so the order doesn’t go overdue while you wait on the carrier claim / reship. Keep the Etsy order unshipped until you’re actually ready to send the finished item back.
• Ask the buyer to save screenshots/photos of the tracking status showing “damaged” / “discarded,” plus any receipt/insurance info they have, because the person who shipped it is usually the one who has to start the claim.
• Set a simple deadline in writing (example: “If a replacement item isn’t on the way by May 23, 2026, we’ll cancel and refund”), so it doesn’t drag on indefinitely.

When cancellation is the better move

• If the buyer can’t replace the item, or they’d rather not wait for UPS, the cleanest option on Etsy is to cancel the order and issue a full refund (since you can’t deliver what was purchased).
• Don’t mark anything as shipped and don’t “complete” the order just to stop the timer—if a case is ever opened, clean tracking and accurate order status matter.

One policy/shop-settings tweak for the future (worth doing ASAP)

• Add wording to your Etsy listing description and shop policies/FAQ for this custom service that the buyer is responsible for the item while it’s being shipped to you (and that they should pack well and insure it). Etsy’s own policies also put the risk on the buyer when they send an item to a seller for modification, so it’s good to make that expectation crystal clear before purchase.