Yeah it's legit, at least in a way.
Paypal sucks, and if you sell things on eBay long enough, eventually you will start running into people who want to pay when they don't have money actually in their Paypal account. I guess they use a credit card instead, but whatever. As a seller, to accept those, you HAVE to become a "business" member, which means on EVERY transaction after you become a "business" member (or whatever they call it) you get charged a certain percentage of the price by Paypal. (Edit: I believe this applies even to person to person transactions, not just auction stuff)
Instead of inflating the item sale price, it sounds like this guy is simply adding it on afterwards. IIRC the fee Paypal screws me for is something like 2% or so.
I would draw the line if additional fees aren't mentioned anywhere in the auction. A seller can't arbitrarily add cost after the auction is over. Of course, you don't want to tick the guy off (even if it is his fault) because negative feedback is negative feedback, for those who care about that sort of thing. It needs to be handled civil-like if you have a problem with it.