It's not the ATF that cares, it's the CPSC. The CPSC went after a lot of pyro suppliers several years ago, put many out of business, for selling what they considered "M-80 kits". Some of these vendors actually have court ordered restrictions on the sale of their products, like dark aluminums and some oxidizers. Other vendors don't have to restrict these items but they do to keep the government off their backs.
The thing is flash powder is considered a high explosive by the ATF so making flash powder requires an ATF Type 20 High Explosive Manufacturing License. This is why vendors request this if you are buying materials that could be used to make flash powder.
They are trying to stay in business, however doing this seriously cuts down on the amount of sales they get. So while you may be pissed about this, they're just as pissed about it as you.
In the fireworks biz.