Butter the bottom and sides of an 8 by 8-inch straight-sided baking pan. Dust liberally with sifted powdered sugar and set aside.
Pour 1/2 cup water into the bowl of a stand mixer fitted with the whisk attachment. Sprinkle the gelatin over the water and allow to soften, about 10 minutes.
In a 3-quart saucepan, combine the sugar, evaporated milk and 1/4 cup water. Stir over low heat until the sugar has dissolved. Bring the mixture to a simmer and cook, without stirring, until a candy thermometer registers 240 degrees F, about 10 to 12 minutes. Pour the syrup over the gelatin mixture. Beat the mixture at low speed until incorporated. Increase the speed to high and beat until thick, fluffy and tripled in volume, about 10 to 12 minutes. Beat in the orange zest and vanilla extract until just combined. Using a spatula, scrape the mixture into the prepared pan and smooth the surface. Sprinkle with orange decorating sugar. Allow the mixture to set, uncovered, in a cool place (not refrigerated) for at least 8 hours or overnight. Remove the marshmallows from the pan and place on a powdered sugar-dusted surface. Using scissors, dusted with powdered sugar, cut the marshmallows into about 1-inch squares. Dip the cut sides into powdered sugar to prevent sticking. Store in an airtight container for up to 2 weeks.