If you are treating differentials as algebraic units, the second differential is not equal to zero. You can think of it as a second-order infinitesimal, but it is not zero. It can be represented as you did $\text{d}(\text{d}x)$, but it is more often represented as $d^2(x)$.
The total second differential is what you had before trying to simplify:
$$(\text{d}s)^2 + s\,\text{d}^2s = (\text{d}x)^2 + x\,\text{d}^2x + (\text{d}y)^2 + y\,\text{d}^2y$$
For more information on algebraically-manipulable higher-order differentials, see my paper "Extending the Algebraic Manipulability of Differentials".