its a bit tricky and the documentation is poor...only trial and error method helps...
here's what i did and what worked (im on SUBDIRECTORIES !!, on subdomains you may not have to do all this as you may not have the same problems) :
1)First of all we download Simple Tagging plugin from here: http://trac.herewithme.fr/project/simpletagging/wiki/Download
I used latest version 1.6.8.1 and it works. So we download it, unzip and copy the "simple-tagging" folder into our "mu-plugins" folder on the webserver.
2) Now, while WP MU does not recognize plugins in Subdirectories of "mu-plugins", we have to make a new file called "stp.php" and put only one line of code in it:
<?php include('simple-tagging/simpletagging.php'); ?>
Then we upload this "stp.php" into "mu-plugins" directory. This step will allow WP MU to recognize the plugin from the subdirectory which will enable the Simple-Tagging plugin for ALL users, and they wont have to activate plugin manually.
3) So the Simple-Tagging plugin should now be working already. You will see the "STP: MU Options" tab under the "Site Admin" tab in the control panel and a separate "Tags" tab.
Now you should already have a fully working tagging system on a per-blog basis. Users will be able to add tags to their posts and if you place this function: <?php STP_Tagcloud(); ?> in one of your template files (f.ex. "index.php"), you will be able to show tags of the current blog.
I've found that to show tags for the MAIN blog (domain.com), you have to change tags search base in "Tags/General Options" tab to: blog/tags So when a tag is clicked on the Main Blog, the url to the tag will be: domain.com/blog/tags/whatever_the_tag_is and in other blogs: domain.com/blog_name/tags/whatever_the_tag_is. So we are done now with the tags for a per-blog basis.
>>>>>> Now the 2nd part: installing "Danalog's WPMU Site Wide Tags" which will allow us to show a Site-Wide Tag cloud.
4) Download and unzip the plugin to your computer from http://code.danalog.nl/danalog-wpmu-site-wide-tags.txt
5) Now the tricky bit - explanation later, just follow the instructions :) Open the file you downloaded "danalog-wpmu-site-wide-tags.txt" in any text editor.
Change line 37 to this: $domain = "YOURDOMAIN.com"; where YOURDOMAIN is your domain :)
On line 44 make sure you have this: $tag_depth = '2';
Line 106 change this:
<a href='http://YOURDOMAIN.com/tags/$key_url'
into this:
<a href='http://YOURDOMAIN.com/tags/tags/$key_url'
where YOURDOMAIN is again your domain :)
6) That's it, change the extension of the file to .php and upload to your "mu-plugins" folder.
7) Place this function: <?php dmk_show_tagcloud(); ?>
in one of your template files (f.ex. index.php) where you want to show the site-wide tags cloud.
8) Next, create a new blog "TAGS" under "domain.com/tags".
9) Create a file called "404.php" on your computer and place the following function into this file:
<?php dmk_show_taglist(); ?>
10) Now upload this "404.php" into "/wp-content/themes/THEME_YOU_ARE_USING" for your site.
ANNDDDD here you go! You have a working Site-WIde Tag solution for your website.
Now you can show tags on a per-blog basis as well as Site-Wide tag cloud. If something doesnt work - first decide if this is the first plugin problem or the second plugin problem and then try the trial and error methor. Also all questions welcome. Im not a WPMU guru, but what i did works and i want to help others.