Should 'Tuo sana on Espanjalainen' be accepted too?
Nope. Only names are capitalised.
Tuo sana on espanjaa. - In my head it means "This word is Spanish language". Shouldn't it be with an adjective - "tuo sana on espanjalainen?"
No, "this word is Spanish language" would be "tuo sana on espanja". The partitive case in "espanjaa" basically gives the noun a meaning which is something like "some Spanish", and it's more idiomatic than using an adjective.
I understand that espanjaa is idiomatically correct, but would espanjalainen also be technically correct, even if not typically used?