Meh, I should have looked at the help first.
Refund in full is necessary to cancel. But you get the related fees (Both DC and Etsy) back on the partial refund.
I guess that means one is out the listing fee. And could be a pain for your books depending on how you do inventory. And confusing in general if you go back to reference the order at a later date.
Okay so that bears the question....now that I am thinking about it....
If a BUYER gets confused down the road, checks their receipt sees two items listed and opens a case because they didn't receive one of the items (because they forgot about cancelling one). What happens then?
Thanks for bringing this up Fern, as a seller I think I would have to put the buyer through a full cancel and repurchase to avoid any of the above pitfalls. I never would have thought about it on my own.
These are the help articles I referenced:
http://www.etsy.com/help/article/2037http://www.etsy.com/help/article/228