Hi Mrs Readhill,
As you will probably have read the earlier replies in this and a couple of other threads on this subject, you will know that you are legally entitled to repurpose items of this sort without infringing the underlying copyright. However it would appear that the person who has contacted you doesn't fully understand the law, so I will try set out the law in a different way. To be fair to the artist it may well be that they have misunderstood what is happening with your decoupage items and possibly is unaware that you will have legally purchsed the napikins in the first place.
An artist who creates an artistic work is entitled to copyright in her creation. Copyright is actually a bundle of rights the main three of which are the reproduction right (ie the right to authorise or not the copying of the work), the distribution right (that is the right to authorise or not the distribution of the work) and the communication right, that is, the right to authorise or prohibit any communication to the public of their works, by wire or wireless means, including the making available to the public of their works in such a way that members of the public may access them from a place and at a time individually chosen by them. These are known as economic rights since in exercising them the artist may benefit financially. There are also some moral rights which we don't really need to go into here. As the artist in your case is unlikely to accept the word of someone like me on website, here is a link
to how the EU Information Society Directive* describes these rights (see Articles 2, 3 and 4). As the link goes direct to the EU's own legislation website, it can be trusted.
Since you will have legally purchased the napkins, and you are not copying them nor are you making them available by wire or wireless means, the only right in play here is the distribution right. Again we need to consult an authoritative source to see exactly what this right encompasses. Here is the text of Article 4 of the InfoSoc Directive:
1. Member States shall provide for authors, in respect of the original of their works or of copies thereof, the exclusive right to authorise or prohibit any form of distribution to the public by sale or otherwise.
2. The distribution right shall not be exhausted within the Community in respect of the original or copies of the work, except where the first sale or other transfer of ownership in the Community of that object is made by the rightholder or with his consent.
It is the second paragraph which is relevant here. Unfortunately it is written in a slightly confusing way but this is what is known as the doctrine of the exhaustion of rights. Once the artist has authorised the distribution of the napkins bearing her artwork and they have been legally acquired by someone, the artist's distribution right in those specific items is exhausted, or to put it more simply, has come to an end.
This is the reason why you are able to distribute (ie offer for sale) your decoupage items, even though they incorporate the original artwork. You do not need a licence to do this because the artist no longer retains any right to licence to you. The artist has gained the economic reward by the first sale of the napkins, and she isn't entitled to a second amount of money just because you then repurpose the original item and no doubt add extra value.
I hope this helps you to understand the issue, and more to the point, that the artist can be persuaded to see the true situation.
*Even though we are no longer members of the EU, that Directive was incorporated into UK law by the Copyright and Related Rights Regulations 2003 [SI 2003/2498] and remains part of UK law today. In fact much the same wording can be found in Article 6 of the World Intellectual Property Organization 1996 Copyright Treaty to which the UK is a signatory.