Assuming this is the gauge system that does not use the voltage stabilizer... both the gauge and the sending unit have to be connected to the same ground.
Supply 12V to the gauge's "B" terminal, connect the gauge's "T" terminal to the insulated sending unit terminal. Connect your power supply ground to both the gauge and the sending unit and try your test again.
You can also check just the sending unit resistance. The following values are nominal. Don't be upset if yours don't match. 10 Ohms = empty (float arm down), 90 Ohms = full (float arm up)