I wanted to verify if the GPS on my 3GS iPhone was working so I went to 'Maps' and 'touched' the circular icon which pin pointed exactly where I was. So my question is, does that use the GPS to do that or is it using cell towers to pin point the location?

If GPS is being used, you should see a pulsing blue circle around your location -- you may need to zoom to see it. If just a blue circle, then you are using triangulation or in a known WiFi zone (which Access Point MAC address is found on SkyHook Wireless database)

I have an open ticket with Apple regarding GPS. 4 phones without proper GPS after 3.1.2. All of them carrier unlocked and untouched (no hacktivation/jailbreak/unlocking)

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Mandatory reading: [ALL MEMBERS] Jailbreak is not Activate is not Unlock

If GPS is being used, you should see a pulsing blue circle around your location -- you may need to zoom to see it. If just a blue circle, then you are using triangulation or in a known WiFi zone (which Access Point MAC address is found on SkyHook Wireless database)

I have an open ticket with Apple regarding GPS. 4 phones without proper GPS after 3.1.2. All of them carrier unlocked and untouched (no hacktivation/jailbreak/unlocking)

__________________
Mandatory reading: [ALL MEMBERS] Jailbreak is not Activate is not Unlock

Turn on the Airplane mode and try again

You need airplane mode on, wifi on and location services on. This will remove any cell tower triangulation but giving internet access to load the maps. Still could possibly use wifi location..

Otherwise you need a standalone GPS program that does not rely on the net to get maps

I just tested this on my 3GS, could not locate myself with wifi off.

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iPhone 3GS 32GB factory unlocked (3.1; Pwnagetool, Cydia, OpenSSH)
iPhone 8BG (3.1.2; Pwnagetool, Cydia, OpenSSH)