On submit if the form has validation errors then the select box selects the default category

Confirmed. I'm not yet sure how to tackle this problem though.

I could think of a jquery solution:

a php funtcion that picks up the selected terms (together with the inactive options) in an associative array and (on validation error) builds a jquery snippet that fills the set of selectors with the previously selected items.

@derjochenmeyer: that's not a proper solution. We need to take advantage of the Form API to fix this.

Fix committed.