"Taking a piss" is literally urinating. Piss is a synonym for urine. "Taking the piss" in this context means mocking somebody/something.

You can also "take the piss" if you're lying, exaggerating or any number of other social mistakes. If someone said that they had 5 years experience in PHP on their CV and you later found out they didn't, you could say they were taking the piss.

Obviously, it's quite an informal phrase. It's also one that just sounds wrong out of context, the correct context being quite hard to define. Like all slang you have to live amongst people using it before you pick up correct usage.