diff --git a/app/components/inventory/AddItemForm.vue b/app/components/inventory/AddItemForm.vue
index 3fe8082..cf16d44 100644
--- a/app/components/inventory/AddItemForm.vue
+++ b/app/components/inventory/AddItemForm.vue
@@ -68,37 +68,7 @@
 
       <!-- Tags -->
       <UFormGroup label="Tags" hint="Optional">
-        <div class="space-y-2">
-          <!-- Selected Tags -->
-          <div v-if="selectedTags.length > 0" class="flex flex-wrap gap-1 mb-2">
-            <UBadge 
-              v-for="tag in selectedTags" 
-              :key="tag.id"
-              :style="{ backgroundColor: tag.color }"
-              class="text-white cursor-pointer"
-              @click="removeTag(tag.id)"
-            >
-              {{ tag.icon }} {{ tag.name }} ✕
-            </UBadge>
-          </div>
-
-          <!-- Tag Selection by Category -->
-          <div v-for="category in tagCategories" :key="category.name" class="space-y-1">
-            <p class="text-xs font-medium text-gray-500 uppercase">{{ category.name }}</p>
-            <div class="flex flex-wrap gap-1">
-              <UButton
-                v-for="tag in category.tags"
-                :key="tag.id"
-                size="xs"
-                :color="isTagSelected(tag.id) ? 'primary' : 'gray'"
-                :variant="isTagSelected(tag.id) ? 'solid' : 'outline'"
-                @click="toggleTag(tag)"
-              >
-                {{ tag.icon }} {{ tag.name }}
-              </UButton>
-            </div>
-          </div>
-        </div>
+        <TagsTagPicker v-model="selectedTags" />
       </UFormGroup>
 
       <!-- Submit -->
@@ -129,7 +99,6 @@
 <script setup lang="ts">
 const { addInventoryItem, addItemTags } = useInventory()
 const { getUnits } = useUnits()
-const { getTags } = useTags()
 
 const props = defineProps<{
   initialData?: {
@@ -158,18 +127,12 @@ const form = reactive({
 const submitting = ref(false)
 const selectedTags = ref<any[]>([])
 
-// Load units and tags
+// Load units
 const units = ref<any[]>([])
-const tags = ref<any[]>([])
 
 onMounted(async () => {
-  const [unitsResult, tagsResult] = await Promise.all([
-    getUnits(),
-    getTags()
-  ])
-
+  const unitsResult = await getUnits()
   units.value = unitsResult.data || []
-  tags.value = tagsResult.data || []
 
   // Set default unit (Piece)
   const defaultUnit = units.value.find(u => u.abbreviation === 'pc')
@@ -231,39 +194,6 @@ const unitOptions = computed(() => {
   ])
 })
 
-// Tag categories for display
-const tagCategories = computed(() => {
-  const categories: Record<string, any[]> = {}
-  
-  for (const tag of tags.value) {
-    const cat = tag.category
-    if (!categories[cat]) categories[cat] = []
-    categories[cat].push(tag)
-  }
-
-  return Object.entries(categories).map(([name, tags]) => ({
-    name,
-    tags
-  }))
-})
-
-// Tag selection helpers
-const isTagSelected = (tagId: string) => {
-  return selectedTags.value.some(t => t.id === tagId)
-}
-
-const toggleTag = (tag: any) => {
-  if (isTagSelected(tag.id)) {
-    removeTag(tag.id)
-  } else {
-    selectedTags.value.push(tag)
-  }
-}
-
-const removeTag = (tagId: string) => {
-  selectedTags.value = selectedTags.value.filter(t => t.id !== tagId)
-}
-
 // Validation
 const isValid = computed(() => {
   return form.name.trim().length > 0 && form.quantity > 0 && form.unit_id
diff --git a/app/components/inventory/InventoryCard.vue b/app/components/inventory/InventoryCard.vue
index 6e7901a..242fd0d 100644
--- a/app/components/inventory/InventoryCard.vue
+++ b/app/components/inventory/InventoryCard.vue
@@ -50,15 +50,12 @@
 
       <!-- Tags -->
       <div v-if="item.tags && item.tags.length > 0" class="flex flex-wrap gap-1">
-        <UBadge 
-          v-for="tagItem in item.tags.slice(0, 3)" 
+        <TagsTagBadge
+          v-for="tagItem in item.tags.slice(0, 3)"
           :key="tagItem.tag.id"
-          :style="{ backgroundColor: tagItem.tag.color }"
-          size="xs"
-          class="text-white"
-        >
-          {{ tagItem.tag.icon }} {{ tagItem.tag.name }}
-        </UBadge>
+          :tag="tagItem.tag"
+          size="sm"
+        />
         <UBadge v-if="item.tags.length > 3" size="xs" color="gray">
           +{{ item.tags.length - 3 }}
         </UBadge>
diff --git a/app/components/tags/TagBadge.vue b/app/components/tags/TagBadge.vue
new file mode 100644
index 0000000..c77e87b
--- /dev/null
+++ b/app/components/tags/TagBadge.vue
@@ -0,0 +1,71 @@
+<template>
+  <UBadge 
+    :style="badgeStyle"
+    :class="badgeClasses"
+    v-bind="$attrs"
+  >
+    <span v-if="tag.icon" class="mr-1">{{ tag.icon }}</span>
+    <span>{{ tag.name }}</span>
+    <UButton
+      v-if="removable"
+      icon="i-heroicons-x-mark"
+      size="2xs"
+      color="white"
+      variant="link"
+      class="ml-1 -mr-1"
+      @click.stop="$emit('remove', tag.id)"
+    />
+  </UBadge>
+</template>
+
+<script setup lang="ts">
+interface Tag {
+  id: string
+  name: string
+  color: string
+  icon?: string
+  category: string
+}
+
+const props = withDefaults(defineProps<{
+  tag: Tag
+  removable?: boolean
+  size?: 'sm' | 'md' | 'lg'
+}>(), {
+  removable: false,
+  size: 'md'
+})
+
+defineEmits<{
+  remove: [tagId: string]
+}>()
+
+const badgeStyle = computed(() => ({
+  backgroundColor: props.tag.color,
+  color: getContrastColor(props.tag.color)
+}))
+
+const badgeClasses = computed(() => ({
+  'cursor-pointer': props.removable,
+  'text-xs px-2 py-1': props.size === 'sm',
+  'text-sm px-2.5 py-1': props.size === 'md',
+  'text-base px-3 py-1.5': props.size === 'lg'
+}))
+
+// Calculate contrast color for text (black or white)
+function getContrastColor(hexColor: string): string {
+  // Remove # if present
+  const hex = hexColor.replace('#', '')
+  
+  // Convert to RGB
+  const r = parseInt(hex.slice(0, 2), 16)
+  const g = parseInt(hex.slice(2, 4), 16)
+  const b = parseInt(hex.slice(4, 6), 16)
+  
+  // Calculate luminance
+  const luminance = (0.299 * r + 0.587 * g + 0.114 * b) / 255
+  
+  // Return white for dark colors, black for light colors
+  return luminance > 0.5 ? '#000000' : '#FFFFFF'
+}
+</script>
diff --git a/app/components/tags/TagPicker.vue b/app/components/tags/TagPicker.vue
new file mode 100644
index 0000000..c0d585a
--- /dev/null
+++ b/app/components/tags/TagPicker.vue
@@ -0,0 +1,125 @@
+<template>
+  <div class="space-y-4">
+    <!-- Selected Tags -->
+    <div v-if="selectedTags.length > 0" class="flex flex-wrap gap-2">
+      <TagsTagBadge
+        v-for="tag in selectedTags"
+        :key="tag.id"
+        :tag="tag"
+        :removable="true"
+        @remove="removeTag"
+      />
+    </div>
+
+    <!-- Empty State -->
+    <div v-else class="text-sm text-gray-500 italic">
+      No tags selected
+    </div>
+
+    <!-- Tag Selection by Category -->
+    <div v-for="category in tagsByCategory" :key="category.name" class="space-y-2">
+      <h4 class="text-xs font-semibold text-gray-500 uppercase tracking-wide">
+        {{ category.name }}
+      </h4>
+      <div class="flex flex-wrap gap-2">
+        <UButton
+          v-for="tag in category.tags"
+          :key="tag.id"
+          size="sm"
+          :color="isSelected(tag.id) ? 'primary' : 'gray'"
+          :variant="isSelected(tag.id) ? 'solid' : 'outline'"
+          @click="toggleTag(tag)"
+        >
+          <span v-if="tag.icon" class="mr-1">{{ tag.icon }}</span>
+          {{ tag.name }}
+        </UButton>
+      </div>
+    </div>
+
+    <!-- Loading State -->
+    <div v-if="loading" class="text-center py-4">
+      <div class="inline-block animate-spin rounded-full h-6 w-6 border-b-2 border-primary-500"></div>
+      <p class="text-sm text-gray-500 mt-2">Loading tags...</p>
+    </div>
+
+    <!-- Empty State (no tags available) -->
+    <div v-if="!loading && availableTags.length === 0" class="text-center py-4">
+      <p class="text-gray-500">No tags available</p>
+    </div>
+  </div>
+</template>
+
+<script setup lang="ts">
+interface Tag {
+  id: string
+  name: string
+  color: string
+  icon?: string
+  category: string
+}
+
+const props = defineProps<{
+  modelValue: Tag[]
+}>()
+
+const emit = defineEmits<{
+  'update:modelValue': [tags: Tag[]]
+}>()
+
+const { getTags } = useTags()
+
+const availableTags = ref<Tag[]>([])
+const loading = ref(true)
+
+// Load tags on mount
+onMounted(async () => {
+  const { data, error } = await getTags()
+  if (data) {
+    availableTags.value = data
+  }
+  loading.value = false
+})
+
+// Computed
+const selectedTags = computed(() => props.modelValue)
+
+const tagsByCategory = computed(() => {
+  const grouped: Record<string, Tag[]> = {}
+  
+  for (const tag of availableTags.value) {
+    if (!grouped[tag.category]) {
+      grouped[tag.category] = []
+    }
+    grouped[tag.category].push(tag)
+  }
+
+  return Object.entries(grouped).map(([name, tags]) => ({
+    name: name.charAt(0).toUpperCase() + name.slice(1),
+    tags: tags.sort((a, b) => a.name.localeCompare(b.name))
+  })).sort((a, b) => {
+    // Position category first, then others alphabetically
+    if (a.name === 'Position') return -1
+    if (b.name === 'Position') return 1
+    return a.name.localeCompare(b.name)
+  })
+})
+
+// Methods
+const isSelected = (tagId: string) => {
+  return selectedTags.value.some(t => t.id === tagId)
+}
+
+const toggleTag = (tag: Tag) => {
+  const isCurrentlySelected = isSelected(tag.id)
+  
+  if (isCurrentlySelected) {
+    removeTag(tag.id)
+  } else {
+    emit('update:modelValue', [...selectedTags.value, tag])
+  }
+}
+
+const removeTag = (tagId: string) => {
+  emit('update:modelValue', selectedTags.value.filter(t => t.id !== tagId))
+}
+</script>