User can add taxonomy

Sorry, thats not possible with the builtin plugin functionality. You’ve to build this functionality on your own with the help of documentation.

Do you mean using a html field or action hook ?

Edit. Sorry never mind. Thought your link was the link to the main doc. Can you give more information on the action hook .

The action hook field already gives some information about how to work with action hooks.
[php]
add_action(‘HOOK_NAME’, ‘your_function_name’, 10, 3 );
function your_function_name( $form_id, $post_id, $form_settings ) {
// do what ever you want
}
[/php]

So the approach you’ve to take is:
1) Show a category dropdown in this function.
2) Handle the onchange event of the dropdown and send ajax request
3) Check if there aren’t any states for that country and send response
4) Handle the response and show/hide input field for new state
5) Upon submitting the form, use the wpuf_add_post_after_insert hook to create a taxonomy entry and attach to the post id. Example:

[php]
function wpufe_create_tax( $post_id ) {

if ( isset( $_POST[‘your_tax_name_input’] ) ) {
// create your taxnomy and attach to the post id
}
}

add_action( ‘wpuf_add_post_after_insert’, ‘wpufe_create_tax’ );
add_action( ‘wpuf_edit_post_after_update’, ‘wpufe_create_tax’ );
[/php]

Thats all I can help.