Kevin Mahoney had said he would resign from the party if former Conservative MPs Neil Hamilton and Mark Reckless are chosen to stand.
Mr Mahoney was told about the disciplinary action at a meeting of the party's Wales committee on Saturday.
He will now become an independent member of Vale of Glamorgan council.
The meeting also formally decided how regional candidates would be picked, after months of internal arguments.
A ballot paper will be sent to all UKIP Wales members with a shortlist of potential candidates and members will vote for who they want to represent the party in their electoral region.
The results will be verified by an independent body.
The regional seats are seen as the party's best chance of getting members elected in May due to the proportional representation system.
Dave Rowlands, from UKIP Wales, said: "The matter has been resolved now as to how the ballot will go forward.
"We hope it will take no longer than three to four weeks."
On Thursday, four UKIP Wales 2015 general election candidates called for leader Nathan Gill to resign over the way the selection process has been handled.
Kevin Mahoney said: "I am delighted that my public stand against the political cronyism within UKIP and its national and Welsh leadership has resulted in a forcing of the decision to give the entire membership of Wales a vote on the list order which had been previously been denied to them."
He added: "Possibly my greatest regret is that for the first time since I  became eligible 39 years ago, I will find myself unable to vote in the May elections, as I regard all the current political parties in Wales to be as bad as each other."
A UKIP councillor who accused the party of "cronyism" has been removed from a list of potential assembly election candidates.