This plugin provides automated SASS stylesheet generation.
I have no idea. But, if you add a second parameter to the wpsass_define_stylesheet() call in functions.php:
Then any errors encountered will be printed as html comments on your site. That should provide some insight, but they will appear at the top of the page before the opening tag, so only use this feature to determine why style.css fails to update and then turn it back off again.
The standard compiler is Compass, but that typically requires installation on the server. To avoid requiring Compass or another haml/sass conversion program to be installed on your server, this plugin uses a PHP based compiler.
The initial release used a project named PHamlP (http://code.google.com/p/phamlp/), but that implementation had some serious flaws and has not been updated since late 2010. The plugin now uses a very up-to-date implementation named phpsass (https://github.com/richthegeek/phpsass) which looks to be a dramatic improvement.
First, the wpsass_define_stylesheet() function no longer requires the target filename. It does now require that the source filename has a .sass or .scss extention and the target will automatically be set to the basename with a .css extension.
Second, the plugin now automatically enqueues the target stylesheet (if it exists).