Aeotec Nano Switch Physical Switch Behavior

I have installed an Aeotec Nano Switch and everything is mostly working. Z-wave control works and the physical switch works, however I was expecting the physical switch to toggle the nano switch state, is this not possible?

For example, if I turn on the physical switch, the light turns on as expected. I then turn the light off using Z-wave and the light turns off as expected. The problem comes on the next physical switch toggle which would be to the off position, since the light is already off (from Z-wave), I have to toggle the physical switch off and then back on for the light to turn on.

Am I missing a setting somewhere that allows me to set the physical switch to toggle states versus a pure on/off state?

Have you made the adjustments for the state of the switch in both the Nano and in the Hubitat prefers for the device? (See screenshots)

Which DH is this? I am using the DH that is built in and have the external switch mode set to 2, 2-state switch mode. I have tried all of the different switch modes.

I can only report that, yes, it is possible. At my old house, I did this for a switched outlet (4 way, both line and neutral in the outlet box).
The house sold 5 weeks ago, so I cannot easily recreate the settings that were used.