In section 2.2.2, \"CSS and Sass\", I\'m told to put image-url(\'delete.png\') in my sass. And so I have.
However, it is generating CSS like
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This looks to be due to your version of sass-rails (3.1.0). I can reproduce your problem (thanks for posting the Gemfile) and it goes away when bumping to sass-rails 3.1.4.
Try upgrading to 3.1.4 and clearing tmp/cache. Also make sure you're not hitting any browser caches.
I know you said 3.1.4 was causing other problems... have you tried higher versions?