Muni fiber: L1 or L2?

Nope The power going into each fiber out of the splitter is 1/16th
that of what went into the splitter.

... which is 12 dB loss.

Yes, your total in-line loss is still 10km, but you are forgetting
about the fact that you lost 15/16th of the power effectively going
to the fiber when you went through the splitter (in addition to the
splitter loss itself).

So: CO Based splitter:

Each customer gets (IN - 16dB - (10km x .26db))/32

Each customer gets IN - ~0dB - 12 dB - 2.6 dB = IN - 14.6 dB.

Splitter at 9km:

Each customer gets (IN - (9km x .26dB) -16db)/32-(1km x .26db)

Each customer gets IN - 2.34 dB - 12 dB - 0.26 dB = IN - 14.6 dB.

If we use 5dBm as our input, this works out:

CO: (5db - 16db - (10km x .26db) / 32
/32 is effectively -15 db (-3db = � power, 32 = 2^5)
Substituting: (5db - 16db - 2.6db) -15db = -28.6db to each customer.

Spitter at 9km: (5db - (9km x .26db) -16db)/32-(1km x .26db)
Substituting: (5db - 2.34db -16db)-15db-.26db = -28.08db to each customer

So there is a difference, but it seems rather negligible now that I've
run the numbers.

However, it's entirely possible that I got this wrong somewhere,
so I invite those more expert than I to review the calculations
and tell me what I got wrong.

You are multiplying logarithmic values.