You're generally entitled to a refund on a recalled item regardless of condition - the recall itself is grounds for return, and the store's "physical defect" rule doesn't override safety recalls. Check your local consumer protection laws (they vary by region), but most places require retailers to honor manufacturer recalls. I'd push back on the store's position in writing, reference the specific recall, and if they won't budge, contact the manufacturer directly or your local consumer protection agency - they usually side with you here.