This is not a problem if your friendly merchant records it on his book as a cash refund for a returned item.

The real problem is that this is a violation of his merchant credit card agreement. Credit card companies don't like deals that result in cash advances disguised as purchases, since most cardholders have much lower cash advance limits than credit limits. As a result they are very strict about enforcing rules intended to prevent this : In this case they would almost certainly catch it and cancel the merchants credit card account (ruining him since he can no longer accept credit cards) and perhaps even cancel the customer's credit card account.

Strangly credit card companies are not too concerned about your airline miles, since those are paid by the merchant discount fee.

Many credit card agreements also forbid you to use your personal credit card to charge buisness expenses : the rationale is that they offer buisness (corporate) credit cards which cost the merchant a higher discount rate and usually have higher annual fees. I have had a relative threatened by Discover card because he bought 3 computer in 1 month on the grounds that if he continued they would assume he was buying stuff for his employer (which wasn't far from the truth) and cancel his card.