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Does anyone know if it's possible to have a multiselect on a custom record of 'department', and then have another multiselect of 'item' which only shows items with a department of any selected departments on the other mutliselect?

as an alternative, you should be able to do this via source filtering

set the filter on the item field to
Filter Using: Department
Compare Type: equal
Compare to Field: whatever your custom department multiselect is