You can't multi-select in a pop-up list UI element -- you'll have to either convert the single note-tags variable into multiple variables (one for each value) and use checkboxes, or leave it out from that dialog and use an extra "Prompt with List" action with "Allow Multiple Selection" enabled.
It's just text, so you can "Search and Replace" every linefeed with a space. The trick is that, when you multi-select, every line including the last has a linefeed that will become a space -- so you'll have a trailing space at the end of the text which you probably don't won't. But KM has a "Filter" action with the option of "Trim Whitespace", which removes all whitespace from the start and end of some text.
To pretty things up a bit -- the "Prompt with List" action allows you to display a "friendly" value instead of the actual data you want to return when the item is chosen. You separate the two with a double-underscore, so:
...will display Music to the user but return #music to your macro.