Smart Coupons provide a powerful, “all-in-one” solution for gift cards, store credits, discount coupons, and vouchers extending the core functionality of WooCommerce coupons.
This doc article explains the compatibility of Smart Coupons with PayPal Standard & how it calculates the discount when a store credit/gift card is applied.
Since PayPal doesn’t allow discounts on shipping & taxes, it’s not possible to use store credit on such orders where the store credit amount is more than the items total but less than the order total (items total + shipping + taxes) & the order is being paid by PayPal.
So, for the store credit or gift card to get applied, you’ll need to enable the “Apply Before Tax” option under WooCommerce > Settings > Smart Coupons.