QUESTION: Here is the situation: Let's say I am selling wooden bird houses that I make. For each bird house, I want to stick on a decal of an American Flag. (The decals were purchased by myself from a Company selling them on ebay.) And, so, I purchase that decal and stick it onto the bird house and then sell it. Is that legal or illegal?
ANSWER: The American flag is in the public domain. Therefore, the American flag is not the subject of copyright or trademark.
Therefore, if your decal is not a modified version of American flag, you can put it on your product and sell the product.
If the decal you purchased is copyrighted, there is a first sale doctrine. That doctrine means that if you purchased the decal from the copyright holder, you have the right to sell the purchased decal.
Likewise, if the decal your purchased is a trademark, there is a first sale doctrine. In this situation, however, it is questionable whether a flag in the form of a decal could be a trademark since the decal is just that, and not placed on a product or service.