You did not post your Cherokee information. The correct answers to even the most simple questions will vary significantly based on your model year, engine size, transmission, and transfer case. ALWAYS include this info in your tech questions.
There are three type of Crankshaft position Sensor Mounting styles. You need to be sure the replacement CPS is the correct style for your year of XJ.
A) 2 Bolts
B) 2 Nuts
C) 1 Bolt
The paper spacer is for the 1 bolt style. The 1 bolt style is for older XJ's. Press the CPS firmly into the hole to make contact. If you have an older XJ that uses the one bolt style CPS, follow the instructions.