you have edited the state form element o the checkout page to be a text box instead of a select list. For it to work properly and show the australian states, it needs to be a select list like it was originally.
the original checkout form uses a select list for the states and is populated by a recordset. by changing it to a text box, you have broken the functionality that populates the list with the appropriate states for the selected country. you will need to revert back to the original checkout page.
No, power store does not support using a two page checkout form.