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I noticed this had been an issue in a previous version but I have the latest (7.x-3.0-rc1) and the states/provinces will not update when the view is a dropdown. Autocomplete doesn't have the problem--just dropdown. The droplist fails to update when the country is changed.
Before it looks like the culprit was in the _location_country_ajax_callback function in the location.module file but I checked mine against the patch from a year ago and it rc1 already has that patch in place.