Local hostnames not resolving

Don't do this. There is no reliable concept of "backup". Given multiple DNS servers, clients are free to use any of them, which will lead to some DNS traffic bypassing Pi-hole.

How is Pi-hole aware of this domain name mapping to a local IP? Typically this is done in a local hosts file entry or by using Local DNS records in Pi-hole admin GUI. Example from my network (the commands are run from the Pi, but the answer is the same regardless of which client makes the dig request).

cat /etc/hosts
127.0.0.1   localhost nanopi-neo
::1         localhost nanopi ip6-localhost ip6-loopback
fe00::0     ip6-localnet
ff00::0     ip6-mcastprefix
ff02::1     ip6-allnodes
ff02::2     ip6-allrouters

127.0.1.1	NanoPi
192.168.0.1	Airport-Extreme-3TB
192.168.0.2	TC-Extreme-3TB-extender
192.168.0.90	Sonos-Beam

From any connected client, the answer is as follows:

dig sonos-beam +short
192.168.0.90