Also, I do not support treating nightsoil as a moving liquid due to the resulting increased complexity. Instead, it should be treated as an object, which generates miasma at periodic intervals before eventually decaying into fertilizer, and disappears in water, turning it brown and undrinkable (and since it will not disappear in water that has already been contaminated, flowing water will be neccesary).
That works, and dissolves a lot of the issues. Good one.
Also, I third "nightsoil".
To add my two cents ; how about two types of toilet... an open hole where dwarves can void directly into whatever's underneath it (running water, magma, a deep trench, etc.), and a chamberpot that has to be routinely emptied into a designated zone by the poor dorfs assigned to garbage-hauling. The simplest system could be a single clay pot that gets occasionally dumped outside someplace.
I see three levels:
1) A trench. Maybe this could be added as an option in the dig menu, as it has other applications. Basically, I see a trench as a narrow, shorts channel. You can walk across it, it doesn't take up the whole square and, if filled with liquid, can only carry up to 2 or 3. Aside from possible future defence options (fill it with spikes, oil to light, etc.), it could be used to make any sort of water system easier to set up, which has benefits beyond sanitation.
But I digress. On-topic, a trench would be dug outsided, used for a while, slowly fill and then be buried over and a new one dug in another tile. I'm unsure what the long-term effects are. Is this soil now more fertile? Does it become so after a season of being buried over?
This system is almost instant to setup, but requires a little micromanagement and won't cope with many dwarves.
2) An outhouse or chamberpot: This is what Dynastia describes. Requires some labour, but is infinitely reusable. Designate a zone over a river or into the caverns (or a volcano), and dwarves will dump it there. You could also designate an area for compost or decomposition. Perhaps this could be expanded to rotting meat, dead crops and plants, etc.? Get fertiliser without needing to make all that ash. In theory, works for a large number of people, with a corresponding increase in labour needed.
3) Plumbing. Not required in all fortresses, but useful, in the same way a magma piston is useful, but not required. A system of flowing water runs beneath certain rooms, washing away whatever is dropped in from above. This could be a communal latrine (as in ancient Rome), private bathrooms or stalls, as the many modern societies have, or even a place to empty chamberpots without walking outside.
edit: my other problem with this entire thing is simply that it's got an enormously high squick factor. We already have "chunky salsa combat health system" with enormously graphic detail... quite a few people I've introduced to the game stopped playing for that reason ALONE.
There are valid arguments to be had over the difficulty of setting up, over what it might add to the game. It's probably obvious which side of these arguments I stand on, but I do recognise that these are valid arguments. The "squick factor"? Not so much. I mean, I'm assuming most players have had some interaction with a toilet in their lives. It's not necessarily a pleasant thing, but then, neither is butchering kittens. Or, y'know... so I've heard. From other people. Who aren't me.
If it is considered to add something to the game, and
if a system can be designed that doesn't throw something else huge at the newbies to learn or fail, and
if Toady reads such arguments and sees their merit, then it should be added.
I'm honestly not sure how to respond to the argument that a combat system accurately described as "chunky salsa" might possibly,
potentially be pushing it, but an outhouse and abstracted "nightsoil" is definitely crossing the line. I'm not trying to be clever, I'm actually not able to wrap my head around the notion.