Symptom: Mail Contact created via Sharepoint is preventing on premise object from Syncing to O365.
Users are creating mail contacts via sharepoint. When the customer attempts to dirsync the user to O365 we get an error that the proxy address already exist in Azure. We checked MSOL and do not see a mail contact, or MSOL user. Need to verify if there is an SPO object that may be preventing the sync.
Cause: This issue occurs due to a constraint in Azure AD that prevents two objects from having the same Proxy Address. This is to ensure all objects are identified by a unique address.
To help find the object, you can run this cmdlet: Get-msoluser -searchstring [name]
Resolution:Currently there are no ways to work around this constraint and the Exchange Contact will not sync while the SharePoint Online external users exists in the tenant. The only option is to delete the SharePoint Online external user from the tenant, which will allow the Exchange Contact to sync. Once that is done, you can re-invite the external user which will succeed because SharePoint will detect the conflict and not set the proxy address. The downside to this however is that the External User in SharePoint Online will not have a valid email address set automatically, and must be set in the user profile manually. Microsoft is currently working on a long term fix which will allow an external user to appear in the Exchange address list and we used as a SharePoint external user.