I too can confirm this. Any time a local DNS server is specified in conjunction with a public one (I'm testing with 8.8.8.8), iOS 16 seems to prefer the public one - even if the local one is set as the primary. This has occurred with DNS on both WiFi and VPN. On WiFi if I switch DNS to manual, and ONLY have local DNS (which is recursive), I'm able to resolve internal FQDNs. My suspicion is that this has to do with iOS 16 preferring to use DNS that supports DNS-over-HTTPS.