The location associated with the IP address they see may not be your physical location by quite some margin.
If you are connecting via a mobile phone the address is likely to be registered as at one of the phone company's locations which could potentially be in a different state. For many home/office serving ISPs this is similar. Also, if you are using a VPN of some sort the address you present to the web server is quite disconnected from your physical location.
If on the other hand they request your location via your web access client and you agree, it will be using localisation APIs that may well know your location with some precision: using GPS if your device has it and has it turned on, or via wireless AP availability based lookups otherwise.
It's very surprisingly granular. I logged dropped packets from my router's firewall for a week and looked up the origin locations with geoip for fun. Just plugging in the coordinates to google maps would zoom directly in on peoples' houses (sometimes in the middle of nowhere). I'm not sure it's 100% accurate, of course, but it sure seemed specific.
The actual data source will provide a country, state or sometimes even city and zipcode. Then whatever tool you're using to map drops a pin in the middle of that region. If you zoom in, you get whatever happens to be at the geographic center of whatever the mapping tool (probably Google Maps) thinks is the center. eg if it says "United States" and no other data, you get some random ass place in the middle of Kansas. Sometimes there can be more specific data, but just because you can keep zooming in doesn't mean that that's actually where it is
You're describing GeoIP derived from "public" information sources such as the physical address of the assigned entity or the location information provided to the registrar by the block owner.
However, there is a different kind of GeoIP that has the potential to be much more specific as to the location, based on a join between Internet traffic and transactions that target a specific location. e.g. when you purchase a physical item from an online vendor, with your house as the delivery address, they now have both your IP and location. Obviously for this to work it depends on a) the IP address remaining the same for some period of time and b) sharing of the necessary information to allow the join. afaik both are often true.
Basically that and... I'd say when you don't share the location, they only have what's available publicly from GeoIP (via ISPs). Wen you do, your user agent actively tries to give them the best possible results (using GPS or anything else), that's the way I would put it.
Try normal Geo-IP (Maxmind) and it will show the local telco exchange.
I am sure the NSA does better but Kazakhstan? I have been inside one of their embassies to be shocked that they were watching the news on a black and white CRT TV!!!
