Is CA FTB not in breach of IRS rules by demanding ITIN?

Question

The IRS declares in many documents that:
"ITINs are IRS assigned numbers issued only for federal tax administration purposes"
and
"ITINS do NOT Serve as identification outside the federal tax system".
However, FTB disallows Dependent Exemption Credit if the dependents do not provide SSN or ITIN. Only if you are Canadian or Mexican resident then you can use Form 3568.
Question1: Is FTB, by requiring ITINs for Sate Tax purposes, not in breach of the IRS rules that ITINS be used only for Fed Tax purposes? If yes, why is this legal?
Now I am neither Mexican nor Canadian (yes, we do exist) and I have just received a notice from FTB that they have disallowed my dependent exemption credits due to missing ITINs or SSNs. As non-resident aliens with no work authorization, my dependents are not eligible for an SSN. They have applied for an ITIN twice but were rejected with the explanation that (since non-resident aliens are not allowed to have a family for fed tax purposes!) ITIN is only for Fed Tax purposes and they are not going to need them.
Question2: What would be a realistic way out of this enforced logical contradiction? What can we do to claim dependent exemption credit?
Thank you.
Disclaimer: I am not a tax professional but only a very unlucky non-resident alien (visiting professor) who is being milked by tax authorities on every occasion.

quid · Answer

So the eligibility language for the CA EITC Dependent credit requires an SSN or ITIN:
https://www.ftb.ca.gov/file/personal/credits/california-earned-income-tax-credit.html

You must:

Have taxable earned income
Have a valid social security number or individual taxpayer identification number (ITIN) for you, your spouse, and any qualifying children
Not use “married/RDP filing separate” if married
Live in California for more than half the year

So to be eligible for the credit you and the applicable child must have an SSN or ITIN.
It probably goes without saying that I'm just a stranger on the internet and don't know anything and you should talk to a tax professional, but I suspect there's no point to claiming the FTB is somehow illegally using the ITIN.
On the IRS page related to the ITIN, immediately after the part you quoted, the IRS expands:

An ITIN does not:

Authorize work in the U.S.
Provide eligibility for Social Security benefits
Qualify a dependent for Earned Income Tax Credit Purposes

So the IRS is saying the ITIN is only for tax tracking and doesn't authorize any other thing; it's not saying it's illegal for anyone to ever request or use your ITIN. Sort of like the way my drivers license says something like "this doesn't establish eligibility to work or vote." But again, talk to a tax person, not a stranger on the internet.

user102008 · Answer

Is FTB, by requiring ITINs for Sate Tax purposes, not in breach of the
IRS rules that ITINS be used only for Fed Tax purposes?

None of your quotes say that ITINs be "used" only for federal tax purposes. You only have a quote that says ITINs are "issued" only for federal tax purposes. Something can be issued for one purpose and be used for another. I see no contradiction here.
The IRS won't issue you an ITIN if you don't need it for federal tax purposes, and only want it for some other purpose. But once you got an ITIN for filing a federal tax return, I see nothing that says you cannot use it elsewhere. And I see nothing that says state governments or other organizations cannot provide you a benefit for having an ITIN.

Is CA FTB not in breach of IRS rules by demanding ITIN?

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