You didn't say what model it was. When the e start was an add on option, the dealer gets the kits at an attractive price per how many units he gets. AT this point, he may have them on the shelf or may need to source them differently. By the price however, I would guess the flywheel ring gear is toast.BTW the ring gear is already installed from the factory most times and the kits of which I speak are only the starter/ switch etc. A loose starter can also chew up the gear. If applicable, check the mounting holes if you should decide to replace it first. You could post #s and we could look up parts cost.

Its hard to say why the starter gear got chewed up.It might have been improperly installed when it was put on or the starter gear may have stuck causing the flywheel ring gear to chew it up. The question is why didn"t they put a new gear on the starter.
By the way its a tecumseh engine and starter not a toro product they just build blower not the engine. The reason it is so expensive for a replacement is that the factory in canada that made the tecumseh starters and kawi starters burned down and availability is at a premium price.
Just curious but did they check the flywheel key for shearing that could have been the reason for your hardstarting and blue spark.
If they gave you the starter back I would look into a replacement drive kit for it.
good luck JIM

I will try to get the parts and post pictures over the next few days....