Taylor was not sure whether he had collected the ball but after several replays third umpire Steve Davis gave the decision in favour of New Zealand.
In the one-over eliminator, Sri Lanka smashed 13 runs off Southee and in reply the Black Caps got seven after Lasith Malinga bowled an excellent over.
It was a disappointing loss for New Zealand after a good performance by their batsmen. Opting to bat first, New Zealand got off to a good start by Rob Nicol (58) and Martin Guptill (38) to score 174 for seven in 20 overs.
In Image: Sri Lanka's wicketkeeper Kumar Sangakkara, left, watches New Zealand's batsman Rob Nicol, play a shot