How does Halosulfuron-methyl kill nutsedge, while leaving lawn grass and most weeds undamaged?
Halosulfuron-methyl is a member of the family of sulfonylurea herbicides. Brown (2006) mentions in his abstract the following, and I quote:


  This class of herbicides acts through inhibition of acetolactate synthase [...], thereby blocking the biosynthesis of the branched-chain amino acids valine, leucine and isoleucine. This inhibition leads to the rapid cessation of plant cell division and growth. [...] Crop selectivity results from rapid metabolic inactivation of the herbicide in the tolerant crop. Under growth-room conditions, metabolic half-lives in tolerant crop plants range from 1–5 h, while sensitive plant species metabolize these herbicides much more slowly, with half-lives > 20 h. Pathways by which sulfonylurea herbicides are inactivated among these plants include aryl and aliphatic hydroxylation followed by glucose conjugation, sulfonylurea bridge hydrolysis and sulfonamide bond cleavage, oxidative O-demethylation and direct conjugation with (homo)glutathione.


Hence, metabolic inactivation activity differs between susceptible and insusceptible species. To get to your question: this means that the enzymes in lawn grass are also inhibited, but to a lesser extent, as the herbicide is metabolized and inactivated more rapidly in grasses.   

Reference
Brown, Pesticide Science 2006;29:241–378