I had a lengthy conversation this morning with Etsy support regarding a similar issue. The above point made "every [physical] item MUST have a tracking number" is true. Even if you are hand delivery it to your neighbor; there must be a tracking number that is issued by one of the available shipping vendors. Also, be aware that if you select "this item has no tracking" - you are labelled as not shipping on time (or it lowers your shipping rating).
I sell digital items and I just added physical items to my store. A customer purchased 1 digital item and 1 physical item in the same cart. The physical item was a mistake and the customer and I had a very positive conversation about it. I refunded the cost (including tax) for the physical item rather than canceling the sale because then the customer would not be able to access their digital item. Because I refunded I could not cancel the shipping. I contacted Etsy support at that time and asked for their help because I was worried it would affect my rating. I was told to choose "does not have tracking" and I felt I was being told that it wouldn't affect my rating. Unfortunately, that was not the case, which led to this mornings Etsy support convo.
Even though I have proof that I refunded and had a pleasant convo with the customer, Etsy support says they cannot change the Star Seller rating (like its some kind of autonomous creature). I was told by Etsy support that I should have canceled the entire order, but I explained the issue with the digital item. If I did cancel the order and the customer already downloaded the digital item, then essentially I would be giving the customer a free product - because how do you force someone to re-buy a product they already received?
Another issue that this brings up is the "forced tracking" requirement. As stated above, if it is a local delivery then Etsy is forcing us to a pay money for something that is not needed so that we can retain our Star Selling shipping stat. Which essentially means we (the seller) are being forced to pay for something that is not necessary in order to maintain our appearance. I believe there's a word in the dictionary for this?
Regardless, my shipping stat is now 50%. I'm a 5 star seller across the board (for the most part). My digital and physical products (sewing patterns) are essentially the same. Because of Etsy policy I don't believe I can open another shop with the same branding just for my physical items. I think that would fall under duplicate shops? It might be a gray area, but I don't want to take the chance.
I did point out to Etsy support that Shopify and WooCommerce platforms have the ability to split orders like these. It's really annoying to me that ETsy claims that they cannot change anything, when they constantly change things for us sellers all the time.
[steps off soapbox]
