I don’t think it is illegal, any more than it is “illegal” to dispose of the flag in an unproved way. The law is for government agencies, iirc, and carries no civil or criminal penalty.
That said, I think it is really tacky and bad and wrong and if I saw something like that, I would do what I have done in the past, which is to ask for the manager, and point out his error. I have never not gotten a good response and a “thanks” for the education.
You are wrong on all counts. It is illegal in Nevada to fly a flag above Old Glory. The owner had been called by several people and asked to fix the situation.