You havent registered the taxonomy, example of one I use
register_taxonomy( 'location',
array('business'), /* if you change the name of register_post_type( 'custom_type', then you have to change this */
array('hierarchical' => true, /* if this is true, it acts like categories */
'labels' => array(
'name' => __( 'Locations', 'custom' ), /* name of the custom taxonomy */
'singular_name' => __( 'location', 'custom' ), /* single taxonomy name */
'search_items' => __( 'Search locations', 'custom' ), /* search title for taxomony */
'all_items' => __( 'All Locations', 'custom' ), /* all title for taxonomies */
'parent_item' => __( 'Parent Location ', 'custom' ), /* parent title for taxonomy */
'parent_item_colon' => __( 'Parent location:', 'custom' ), /* parent taxonomy title */
'edit_item' => __( 'Edit Custom Category', 'custom' ), /* edit custom taxonomy title */
'update_item' => __( 'Update Custom Category', 'custom' ), /* update title for taxonomy */
'add_new_item' => __( 'Add New Custom Category', 'custom' ), /* add new title for taxonomy */
'new_item_name' => __( 'New Custom Category Name', 'custom' ) /* name title for taxonomy */
),
'show_admin_column' => true,
'show_ui' => true,
'query_var' => true,
'rewrite' => array( 'slug' => 'location' ),
)
);