If you changed the state dropdown that would explain why paypal is not happy with the address
The default zone type has a mechanism to use give to paypal the corresponding zone code (a 2 letters code). If you changed the type of the custom field, it means that the zones are not used anymore so the systems sends directly to paypal the value selected in the dropdown, which is then not recognized by paypal, thus the error.
So I would advise that you unpublish the address_state field and create your own custom field (which could have any values your want,s ot he same as you have now). By default you won't see your field in the address displayed on the invoices/emails, but you can change that by editing the files "address_template" via the menu Display->Views.