Ya, this is pretty much how I interpreted it too, as did the shop I use for my stickers. What's weird about this is, my pickup is OK (barely, like 1/2" under the max), but a similarly lifted 4Runner wouldn't pass. Makes no sense.
My son has a friend that works in a shop that does inspections, and he swears that the law in NH on tires is that you are allowed 1-1/4" of tread hanging out beyond the fender. I don't think that is correct, but I haven't looked it up, since I don't have the issue.
Honestly, a lot of it comes down to the shop you use for inspections. The year after I did my SAS, I went to several places to get a sticker, most took one look at it and said "no way, the suspension has been modified too much, it doesn't pass". I asked them to show me the rule, but got the "I'm not taking the risk" BS. Then I pulled into a place in Plaistow, the guy did the sticker in the driveway, he never even pulled a wheel or opened the hood. But I also have used another place here in Salem for years since then, they are very fussy, and they don't give me any trouble, because they know I am really careful on my vehicles. Every time I take my pickup over them, all the mechanics stand around it and say "how many miles on this thing again?" Shoulda seen the look on the guys face the first time he saw my transfer-case e-brake...
And, you can get by on the road with being a little over the rules, but you just have to not drive like a jerk. I run my 35's all summer, which puts me over the height and they do stick out almost 2", but I've never been hassled.