Only DOT-enabled technicians can modify the markings of a tank. I do not know in the US, but modifying the markings is a crime here in Italy if done by people not authorized doing so.This is not what happened. They refused to return the tank unless he gave them permission to condemn it and mark it as such. I wonder if the person doing this had any formal certification for conducting visuals. The tank could not be filled before getting a hydro test so it should have been sent to the licensed hydro facility where, if it was faulty, it could be condemned by someone with the authority to do it.
So, if the technician was not DOT-enabled, in no way he could have been marked the tank as unworthy. He needed the signature of the owner on a document for avoiding any further responsibility in case the tank sent back to the owner was used.
The owner, after signing the document, could have taken the tank back home in the identical state it was given to the shop.
If the tank had been damaged, he could have been right to ask for compensation.
Possibly a few bucks, as that was the value (if paid 40 bucks including the valve, which was undamaged and possibly worth half of the total value).
If I had been the technician, having in my hand a risky tank, I would not have touched the markings, but I had drilled some holes in it, making it unusable. Safety first, some money back or forth is much less important.