Ok, so you can make regular categories very deep:
The admin menu shows them nested, and the URLs show this hierarchical structure.
With custom hierarchical taxonomies, the admin view shows them as nested, however the URLs are only 1 level deep.
The admin interface shows them correctly:
CustomTax TaxCategory1 TaxCategory2 TaxCategory2-1 TaxCategory2-2 TaxCategory3
The URLs should be:
However, they are created like so:
/customtax/taxcategory2-1/ (this is at the taxonomy's 'root' level, instead of nested inside its parent)
... sigh... I've tried googling and searching this forum, to no avail.