There are several ways to add material to an existing tag: drag-drop (as with a category); check the desired tag after selecting the material.
Untagging can be done by unchecking the tag checkbox.

As with virtual directories, there is no limit to the depth of the tag tree, but it is advisable to limit the depth to 2 - 3 branches.

It is also possible to change the color of the tag icon.

When a material has a tag (or several), it is visible in the info bar (below the material gallery). Clicking on a tag will load all materials with that tag into the gallery.