Duncan Pryde (7/8/2010)
It only "tabifies" groups of 4 spaces starting from the left, so if you have 5 spaces at the beginning of the line, you'll get a tab and a space after running this.
I think it's the same in Visual Studio.
Actually, it "tabifies" based upon the setting in Options|Text Editor|All Languages/Plain Text/Transact-SQL/XML|Tabs for the Tab Size setting.
In my case, it's set to 2. Selecting tabify on your 5 spaces gives me 2 tabs and 1 space.