I run a business from home, and a customer was upset with her custom purchase. Should I replace or refund?

I do not have a business license, any employees, or tax obligations. I don't really make a profit once all is said and done, after shipping costs and such. I crochet for fun, and I charge the cost of yarn plus a few dollars extra, maybe $4 at the most depending on how long it will take me to finish. I had a woman order $152 worth of items, which was already at a discounted price compared to what they would all be if ordered separate. She was unhappy with them, although they were what she ordered. She was specific so I figured I did everything right. She has cut apart some of the items now to 'fix' them and said she wants $100 of her money back because she is having to go through the 'inconveinence' of fixing the items, but will not return the things she is unhappy with. I told her I will NOT refund ANY money until she returns the items. This seems appropriote, since at any other boutique you cannot return custom items at all. I am offering to meet her in the middle, so that I can work something out where if she returns the item, I will give her money back. But she will not return the items and said she is going to handle it legally. Doesn't it make sense, that just like if you were to go to a Grocery Store and purchase something, you can't have a refund unless you return the item?