Welcome to the AzBilliards twilight zone, the place where people are so clueless that the guy that lies about his listing is praised as a saint, and the guy who calls him on it in an attempt to keep from getting screwed is labeled the scum of the earth and practically run out of town.
And yes, the seller almost certainly lied. We know he knew about the damage because everybody inspects the cues they acquire, so the seller for sure knew about the damage at least at the time that he took possession of the cue. This damage is easily seen and felt in even the most cursory of inspections it seems. So the seller either totally forgot all about the damage on the cue since the time that he acquired it (extremely unlikely as you just don't forget about damage like this especially to an otherwise pristine cue), AND he then didn't even give the cue a five second cursory glance before listing it or shipping it out either one (extremely unlikely as there is nobody that doesn't even give their item a cursory inspection before listing it or shipping it, especially an experienced seller), AND he somehow didn't manage to even accidentally touch that rough butt sleeve or see it during all the times he handled the cue to take pictures of it for the listing or when packing it up to ship out to the buyer (also extremely unlikely)-----OR----- he knew about the damage and decided not to mention it so he could get more than the cue was really worth and crossed his fingers that whoever bought the cue would just let the damage slide because it only needed a butt sleeve refinish that wouldn't be worth pursuing to some people but if they didn't let it slide he would just say he "overlooked" the damage and offer a full refund thereby giving himself plausible deniability and maybe even getting the opportunity to look like a great guy in the process in the eyes of the gullible for "standing behind his product" so there really wasn't any risk for him in trying this little scam.
We all know which one of those two scenarios is about a thousand times more likely than the other, but it doesn't even matter all that much because the level of incompetence and negligence involved in the first scenario is almost as bad as the second scenario. The seller was totally at fault for this mess and put the buyer in a real tough predicament since it was a gift etc. If this were your ordinary mistake that sometimes happens, then an offer of a full refund also covering shipping is more than sufficient. But when the mess is due to your dishonesty or gross negligence, you have more obligation to be both understanding of the problems you have caused for the buyer and more accommodating in how you seek to solve them because it was more than your innocent mistake that caused them, it was your gross negligence or dishonesty.