For product feeds, Wishpot checks your category field to determine how to categorize it (for example, if you're using google base, we look at the g:product_type field). If that field contains a category that is already in Wishpot, it will be assigned to that category. Otherwise, it will be assigned a tag with that name. If you have multiple values in that field (some formats support this, including Google Base) Wishpot will identify the various attributes and create multiple tags for the item.
If you'd prefer to collapse categories and tags in a single list rather than differentiating between them, you can look under "Storefront Display Preferences" and choose "Collapse Categories and Tags"
NOTE: Products can exist in only one category, however they can have as many tags as you like.
The second option, "Wishpot Items" searches all of the items that are in our system, which includes all items uploaded by product feeds. This is where your products will appear. Note that on non-US sites (it.wishpot.com and uk.wishpot.com) this search is the default.