Oz wolfed out (due to jealousy) immediately after picking up Willow's scent on Tara. Also, those spells that Willow and Tara had been getting up to were some pretty darn sexy spells. Like the rose petal spell... you don't have to look too far into the metaphor, there. I think a sexual connection is very strongly implied, even though there is no way of knowing for sure *exactly* how far they'd taken things. Suffice it to say that it made Oz realize what was up -- and he wasn't wrong. To me, it seemes pretty obvious that the wolf man was picking up some olfactory clues as to his former love's sapphic nature.
Let's look at other times similar senses have come up: 1. When she dumps him, Drusilla says Buffy is "all around" Spike. Her strange, future seeing senses picked up on the Buffy/Spike connection, and she wasn't wrong. 2. Angel smelled Spike on Buffy. He wasn't wrong, either. A lot of times, characters' extra or enhanced senses pick up on relationships that have not been clearly defined in the text. It's not necessarily sex that they're picking up on, but something even more threatening: a genuine connection. I think that when a character's enhanced or extra senses pick up something like that about his or her mate, a sexual connection is strongly implied, but that an emotional connection is the bigger stumbling block. I see it as kind of the real world equivalent of intuition. You know that feeling that you have when you just *know* there is someone else in your partner's life, even if you can't prove it? It's like that. The point isn't necessarily how far they've gone physically, the point is that it's out of the original partner's hands.
