Tap water will be fine. The alcohol you're diluting will disinfect it.

If you want to be ultra-sure, then use distilled. But be aware it's also bought by people who use it for their CPAP machines, so don't go nuts.

It depends on where you are; my tap water has extremely high mineral (>40 gpg) content, and I could definitely see that interfering with its disinfectant properties (not to mention leaving a residue behind).

It repeatedly says "distilled water."

"… we find that they would need to add 3.31 ounces of (distilled) water with 8 ounces of 99% IPA …"

Frankly I don't think it matters at all. Consider if you wipe down a surface with 70% IPA it'll dissolve all sorts of crud.