You can use it for children's sleepwear, but you can't sell it because of how the law reads. Just make sure that you use a pattern that is close fitting. None of these baggy things is appropriate because that is what catches fire.
Fire retardant chemicals wash out of clothing, even when washed according to manufacturer's directions, after as few as 4 washings. So, pretty pointless. What DID change and reduced serious burns was the change in jammie design. In recent years, the switch to wearing baggy t-shirts to bed have increased the number of children with burns. So, worry less about the fabric and more about the design of the garment.