Vapor return or liquid return line?

Couple of things probably in play here.
First, fix that line.
Now for the fuel or vapor question. From the FSM:
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Note that it says it is designed to "allow fuel vapors to return to the fuel tank", so there's part of your answer.
The rest of the answer involves the parts being used. The fuel filter does not simply have an additional outlet, it has a .060 orifice to bleed off the vapors. Or more accurately, it is supposed to. Many filters in recent years don't have the restrictor orifice, either due to cost cutting, bad quality control, whatever. I have personally run into this with both Wix and Fram filters, but it seems to be hit and miss. When the restrictor/orifice is not present, the third line becomes a "wet" return since there is nothing to restrict fuel flow. This also means that it bleeds off fuel pressure and flow, potentially causing fuel feed issues.
The remedy? Make sure your filter has the .060 orifice in the filter's return tube. It is plainly visible if you look in there (but I can't photograph it well, otherwise I would include pictures of filters with and without the restrictors- same manufacturers and part numbers!), and if it's missing you can see the paper filter media.
The other option is to add your own restrictor- I make mine out of a 1/4" brass hose connector barb, and tap the inside for a 1/4-20 thread, and screw in a brass allen screw that has been drilled to .060- looks just like a carb jet. That way I don't have to worry if my replacement filter has the correct restrictor or not. Works slick.
Plumb the line to the 1/4" fitting near the top of the tank- no worries there, and no need for a different aftermarket (and notoriously inaccurate) sending unit.