The tap water will have killed any bacteria that were already existing on the sponge, but it shouldn't stop any new bacteria forming.
You know, if I was in your position, I'd be tempted by now to do a massive water change(s) to get rid of the ammonia, then start stocking and fish-in cycle.
You have got media in your filter, right? (again, sorry if it seems a stupid question but I really can't see where you're going wrong). You're not colour blind, are you?
Unless the wife is too