- Install the Hierarchical Select module in sites/all/modules
- Navigate to /admin/build/modules and enable the module and appropriate helper modules.
- Navigate to /admin/admin/config/content/hierarchical_select and setup your global settings
- Create a term reference field and select the "Hierarchical Select" widget type.
- Set the relevant settings for that field.
If your vocabulary was set to "tags" under the "Settings" section you will not get any options to configure Hierarchical Select on that vocabulary.
If you still want a "tagging" system you can still select "Allow creation of new terms" and Hierarchical Select will add a "create new item" to the drop down selection.