That's what I figured. I was trying to figure out why it was not working properly so I switched to 2011 theme and there it was. The culprit was the custom theme. It was using switch_to_blog() to switch to the tags blog for the main site.
So this was building the main page from the posts in the tag blog but the cats were being built differently.
This got a little screwy ticking the box for add posts to main blog with a separate tags blog being used in config.
After I ticked the box to add posts to the main site and the posts stopped adding to the tags blog. Is this standard behavior or could be the custom theme?
In config it says: You can create your post archive in a specific 'tags' blog of your choosing, or you can use the main blog of your site. Each has it's own pros and cons.
Is there somewhere those pros and cons are listed? I am trying to figure out the best way to fulfill our needs.
Thanks for your time and help.