Usually when someone says they have terrible taste in something, it means they aren't good at choosing/likes something that's out of the ordinary. For example: I have poor taste in fashion. This means that the person doesn't know much about fashion, and often makes poor choices for fashion and likes things that most likely aren't very fashionable.

It means that he/she likes pies that are perhaps out of the ordinary in taste/not everyone's usual choice. One could also have a terrible taste in clothes = they don't match their colours well together/prefer a style of dressing that is not seen to be the norm. I hope this helps you.

Using "pie" as an example confuses the issue, because pies literally have a taste (a flavor in the mouth). You are correct when you say "taste" means "discernment," being able to tell bad from good. It usually means a question of fashion or artistic judgement. "The House In Good Taste," by Elsie deWolfe--title of a 1913 book by the woman who created the profession of interior decorating. "Taste is defined by Alison, to be, 'That faculty of the human mind by which we perceive and enjoy whatever is beautiful or sublime in the works of nature or of art.'" --Mark Hopkins "Yuri has stained teeth, he wears that awfill ponytail, and he has bad taste in clothes. He never wants foreign clothing, never wants to be fashionable. He never wants symbols of prosperity. " Quotation from a 2002 novel. "Claire shares the flaws of Proustian women: she has bad taste in art; she is not as young and attractive as she used to be; she is deceptive and "easy," giving Nikolai reasons for jealousy." Interestingly, I find when I do a Google Books search on recent books that in modern writing, the most common uses are "bad taste in men" and "bad taste in women!" (I.e. a poor judge of character when choosing romantic companions).