I read through the DOD licensing agreements, and what it boils down to is they want to control how those service marks are used. The big thing (which doesn't apply to the Space Force Tank Car) is they want to make sure that a commercial entity isn't using it to imply some sort of endorsement (hence they want disclaimers when someone is given permission, saying they aren't in any way connected to the military branch and this is not an endorsement). The other thing is obvious, there are products, like for example political merchandise like T shirts and so forth, they don't want the service marks on for the same reason, implying they endorse the politician/political cause. Then there is the other one, use that they may consider negative on the service, like being on bottles of booze, toilet paper, etc (the way sadly the American Flag is used).
BTW it isn't just military, the seal of the president of the US is the same way, it is supposed to only be used for the sitting president of the US, no one else can use it.
It isn't about licensing in terms of money, it is about making sure the military is not being used to potentially endorse something or promote the idea the military branch thinks a product or politician is worthy of their endorsement. Politicians for example cannot use the service mark in their campaign ads to promote their service in a branch.
I can't entirely blame them, seeing how things are misused and abused, it is a valid concern especially these days.
I am sure it isn't an easy process, and given LOTS is not exactly a huge corporation with lawyers chained and at the ready, I can understand why they had to cancel this. It is sad that a customized toy train that is in the end trying to promote something positive would face this crud. It isn't about money, the military couldn't charge anything for use of the logo (that would be a violation) other than maybe a filing fee for processing the request, it is really about protecting the image of the service.